Understanding Market Averages and Indexes:

Averages reflect the arithmetic average price behavior of a representative group of stocks at a given point in time. Indexes measure the current price behavior of a representative group of stocks in relation to a base value set at an earlier point in time.

Dow Jones & Company prepares four stock averages, and the most popular is the Dow Jones Industrial Average (DJIA). This average is made up of 30 stocks selected for total market value and broad public ownership that consists of high-quality stocks of whose behaviors are believed to reflect overall market activity.

Standard & Poor's Company publishes six major common stock indexes. The value of the S&P index is found by dividing the sum of the market value of all stocks included in the index by the market value of the stocks in the base period and then multiplying the resulting quotient by the base value for respective S&P indexes.

The other three indexes measure the daily results of the NYSE, the NYSE Amex, and the Nasdaq.

Bond Market Indicators:

The bond yield and bond indexes are provide the information on the bond market behavior. The bond yield is the return an investor would receive on a bond if it were purchased and held to maturity. There is a variety of bond indexes. The Dow Jones Corporate Bond Index reflects the simple mathematical average of the closing prices for 96 bonds.

Making Securities Transactions:

Stockbrokers act as intermediates between buyers and sellers of securities. They need to be licensed by both the SEC and the securities exchanges which they operate. They typically charge a fee for their service.

Brokerage firms hold their client's security certificates for safekeeping. It is very important that the stockbroker understands the investment goal of the investor. Three types of brokerage firms are:

1.) Full-service brokers execute client's transactions, provide investment advice and information, hold securities in street name, offer online brokerage services, and extend margin loans.

2.) Premium discount brokers focus primarily on making transactions for customers. They charge low commission, and provide limited online information.

3.) Basic discount brokers are the brokers who execute transactions online or by phone.

Types of brokerage accounts are:

A brokerage account may be either single or joint. Joint accounts are typically between married couples or between parent and child.

A custodial account is one in which a parent or a guardian will take responsibility for all transactions undertaken on behalf of a minor.

A cash account is one in which a customer can only use cash to make transactions.

A margin account is an account in which the brokerage firm extends borrowing privileges to a creditworthy customer.

A wrap account is an account that allows brokerage customers with large portfolios to shift stock selection decisions conveniently to a professional money manager.

Investors can buy stock in either odd or round lots. An odd lot consists of fewer than 100 shares of a stock, and a round lot consists of 100-share unit.

Basic Types of Orders:

1. Market Order: Market order is the order to buy or sell stock at the beet price available at the time the investor places the order.

2. Limit Order: A limit order is an order to buy at or below a specified price or to sell at or above a specified price. A limit order can be a fill-or-kill order (which is cancelled if not immediately executed), a day order (which if not executed is automatically cancelled at the end of the day), or a good-'till-cancelled order (which remains in effect for 6 months unless executed, cancelled or renewed).

3. Stop-Loss Order: When an investor places a stop-loss order, the broker tells the market maker to sell a stock when its market price reaches or drops below a specified level.

Online Transactions:

Some investors become day traders who buy and sell stocks quickly throughout the day. Their goal is to make quick profits, and usually buy on margin which may increase the risk of large losses.

Tips for successful online trades:

Know how to place and confirm your order before you begin trading

Verify the stock symbol of the security you wish to buy.

Use limit orders.

Don't ignore the online reminders that ask you to check and recheck.

Open accounts with two brokers.

Double-check orders for accuracy.

Transaction Costs:

The investor should consider the structure and magnitude of the transaction cost, because it affects the return.

Most firms have established fixed-commission schedules that apply to small transactions.On large institutional transactions, the client and broker may arrange a negotiated commission of which both parties agree.

The Securities Investors Protection Corporation (SIPC) was authorized by the Securities Investors Protection Act of 1970 to protect customer accounts against the consequences of financial failure of the brokerage firm. The SIPC insurance guarantees only that the securities themselves will be returned to the investor.

Investment Advisers and Investment Clubs:

Many investors turn to an investment adviser or join investment clubs to get investment advice.Investment advisers provide detailed, specific analyses and recommendations. The annual cost of the service may run between 0.25% and 3% of the dollar amount of money being managed.

An investment club is a legal partnership binding group of investors to a specific organizational structure, operating procedure, and purpose. The goal of most clubs is to earn favorable long-rem returns by making investments in accordance with the group's investment objectives.

1)Explain why understanding the market averages and indexes can be useful to the investors.

2) Briefly describe the major averages or indexes prepared by Dow Jones & Company, and Standard & Poor's Corporation.