Educational Module Stock indices

Transcription

1 1. Technical skills: to be able to characterize the basics of stock indices 1.1 Well-known stock indices Name the best known stock index in the world. Dow Jones Industrial Average price index, generally referred to as the Dow Jones What is the leading German index called? DAX or Deutscher Aktien Index. 1.2 Fill in the blanks in the following text: Indices reflect the current stock market/market development. Investors can follow the development of the index with a brief glance at the change in index level as compared to the previous day. A rising index is a sign of price gain. A falling index indicates a fall in price of the shares included in the index. 1.3 Evaluate the following statements as true or false and justify your answer. The DAX is the oldest stock index. It was introduced on the 05/26/1896 in Hamburg. False, the Dow Jones Industrial Average price index is the oldest stock index. The index was introduced on the 26th of May 1896 by Charles Dow. The DAX includes the 40 largest publicly listed corporations in Germany. False, the DAX contains the 30 largest corporations in Germany.

2 As Germany s largest publicly traded industrial firm, Daimler AG has a weight of % in the DAX. False, the maximum weight a company can have in the DAX is 10 %. The current weight of Daimler AG can be found on the website of Deutsche Börse AG. Technology companies are included in the TecDAX. True. A 2 % increase in the DAX indicates that all the shares contained in the index rose in value. False, as a rule, a 2 % increase in the DAX means that a majority of companies has gained in value. Individual companies can nonetheless lose value contrary to the overall market trend. 1.4 Advantages of being a rising star in the DAX The media often compares a company s ascent in the DAX to a football club s ascent into the premier league. Identify parallels between the two rising stars. Football: A club in the premier league receives more attention in the media, which can lead to increased advertising and television revenues. Stock exchange: Rising stars in the DAX receive more attention from national and international investors, with the result that the number of potential investors willing to buy shares in the rising star increases.

3 1.4.2 Are there any additional advantages for corporations that are rising in the DAX? Investment companies offering passive investment products such as index funds or index certificates must buy shares of the company in order to simulate the index. This leads to increased demand for the company s shares and, ultimately, to an increase in the price of the shares. 2. Technical skills: to be able to generate a stock index and to calculate it s value 2.1 Create an index. Indices need not reflect the performance of national stock markets (e. g. the DAX in Germany). There are also indices that track a sector, a region or a strategy. Create a sector index for the automobile industry from the following companies. The index should contain ten companies. You may list just the number of the company to be included in the sector index in your response. 1. Luxus Automobil AG (producer of roadsters) 2. Sunglasses AG (producer of sunglasses) 3. Mayländer AG (producer of car brakes) 4. Trend Handy AG (producer of cell phones) 5. Rent AG (car dealership) 6. Hetschel AG (producer of racing equipment) 7. Grip Cars AG (producer of tires and door handles) 8. Solar Universe AG (producer of solar panels) 9. Stuttgart Studios AG (film producer) 10. Immer Sicher AG (producer of airbags) 11. Schorndorfer Mineralwasser AG (producer of drinks) 12. LKW AG (producer of trucks) 13. Sitzkomfort AG (producer of car seats) 14. Always Safety AG (producer of seat belts) 15. Mach1 AG (producer of sports rims) 1, 3, 5, 6, 7, 10, 12, 13, 14 and 15.

4 2.2 Calculate market capitalisation and weight. The automotive index comprises 10 companies. The index designer has set a limit of 20 % as the maximum weight for a company. Calculate the missing market capitalisation and the weight of the individual companies. Finally, check whether the maximum weightage limitations have been maintained. Name Share price (EUR) Number of shares Market capitalisation (EUR) Weight ( %) Luxus Automobil AG ,000, ,000, Mayländer AG ,000, ,000, Rent AG ,000, ,000, Hetschel AG ,000,000 75,000, Grip Cars AG ,000,000 25,000, Immer Sicher AG ,250, ,000, LKW AG ,000,000 50,000, Sitzkomfort AG ,000, ,000, Always Safety AG ,000,000 75,000, Mach1 AG ,000,000 85,000, Total: 1,000,000, Calculating market capitaliaation (market value): share price * number of shares (e. g. for Luxury Automobile AG) = 3.00 EUR * 60 million = 180,000, EUR Calculating weight of shares in percentage terms = market capitalisation of the specific company / total market capitalisation * 100 (e. g., for Luxury Automobile AG) = 180,000, EUR / 1,000,000, EUR * 100 = % None of the shares included in the automotive index exceeds the weight cap of 20 %. 2.3 Bonus exercise: calculate the level of the index The index designer has redesigned the automotive index. Calculate the index level at the end of the first business day. Assumptions: The index designer has set the starting value of the automotive index at 1,000 points. The ratio of the current index level to the total (weighted) market capitalisation is thus always 1:120,500.

5 Index at its start: Name Market capitalisation (EUR) Weight ( %) Share price (EUR) Weighted market capitalization (EUR) Luxus Automobil AG 180,000, ,400, Mayländer AG 120,000, ,400, Rent AG 140,000, ,600, Hetschel AG 75,000, ,625, Grip Cars AG 25,000, , Immer Sicher AG 150,000, ,500, LKW AG 50,000, ,500, Sitzkomfort AG 100,000, ,000, Always Safety AG 75,000, ,625, Mach1 AG 85,000, ,225, Total: 1,000,000, ,500, Suggestions for calculating the index level at the end of the first business day: Calculate the current weighted market capitalisation. Enter your answers in the table. Round off percentages and Euros to two spaces after the decimal. At the end of the first trading day: Name Market capitalisation (EUR) Weight ( %) Share price (EUR) Weighted market capitalization (EUR) Luxus Automobil AG 189,000, ,343, Mayländer AG 120,800, ,435, Rent AG 136,000, ,305, Hetschel AG 76,000, ,715, Grip Cars AG 25,200, , Immer Sicher AG 143,750, ,441, LKW AG 51,000, ,575, Sitzkomfort AG 100,000, ,890, Always Safety AG 81,000, ,488, Mach1 AG 88,000, ,664, Total: 1,010,750, ,486,530.00

6 Calculating weighted market capitalization at the end of the first business day: Market capitalization of each company * weightage at the end of the first business day / 100 Calculating the index level at the end of the first business day: The sum of the weighted market capitalization at the end of the first business day divided by 120,500 yields the index level at the end of the first business day. 121,486, EUR / 120,500 = 1, points 3. Technical skills: to be able to diversify the DAX performance index and the DAX course index 3.1 There is a significant difference between the level of the DAX performance index and that of the DAX course index (see chart in the informational document). Explain what factor accounts for this difference. Refer to the informational document on stock indices. 3.2 Is it possible for the DAX course index to be higher than the DAX performance index? Explain your answer. No, the inclusion of the dividend payouts that have taken place since the DAX was first calculated means that the level of the DAX performance index will be higher than that of the DAX course index.

7 Hints: On 28th of October 2008 Volkswagen common stock rose from Euros at the beginning of trade to Euros at the end of trade. The daily high was 1, Euros. The share s performance can be seen on Börse Stuttgart s website under the reference market archive ( The sharp increase led to Volkswagen common stock having a weight of 27 % in the DAX performance index. Consequently, the development of the DAX was primarily influenced by the performance of Volkswagen common stock. In its Guidelines on the stock indices of the Deutsche Börse, Deutsche Börse AG, the license holder of the DAX, envisions that a company s weight can be capped at 10 % only every quarter. The capping occurs anytime after the third Friday at the end of the quarter. The Deutsche Börse AG could thus have limited VW s weight in the DAX to 10 % on the 22nd of December 2008 at the earliest. However, as a confidence-building measure in its flagship index, Deutsche Börse AG decided to undertake an extraordinary rebalancing of the DAX. In a statement to the press on the 28th of October 2008, Deutsche Börse announced an early rebalancing of the index from the 3rd of November 2008 onward. Deutsche Börse AG press release from the 28th of October 2008 Deutsche Börse AG will carry out an unscheduled rebalancing of the DAX index. Volkswagen AG s share in the index will be capped at 10 percent. In light of recent developments in the price of Volkswagen AG common stock, Deutsche Börse AG approved an extraordinary adjustment of the weight of the DAX index on Tuesday, 28th October The weight cap of 10 percent for shares of Volkswagen AG provided for in the index guidelines which would normally occur at regular intervals will now be advanced to the beginning of trade on the coming Monday (3rd November 2008). The weight of Volkswagen shares in the DAX will be reduced to 10 percent, provided it exceeds this threshold at the close of trade on Friday. At the close of trade today (Tuesday), Volkswagen had a weight of 27 percent. With this capping, the weight of the remaining DAX constituents will also change. The basis for the new calculation will be the final Xetra courses as of the coming Friday, 31st October The next scheduled date for an adjustment of the index is the 22nd of December DAX, MDAX und TecDAX are registered trademarks of Deutsche Börse AG. Dow Jones Industrial Average price index is a registered trademark of Dow Jones & Company, Inc.