Educational Module Stock indices

Transcription

1 1. Technical skills: the ability to characterize the basics of stock indices 1.1 Well-known stock indices Name the best-known global stock index. Dow Jones Industrial Average price index, generally referred to as the Dow Jones What is the leading German index called? DAX 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 the index level as compared to the previous day. A rising index is a sign of price gains. 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 26th May 1896 in Hamburg. False, the Dow Jones Industrial Average price index is the oldest stock index. The index was introduced on 26th May 1896 by Charles Dow. The DAX includes the 40 largest publicly listed German companies. False, the DAX contains the 30 largest German companies.

2 As Germany s largest publicly traded industrial company, Daimler AG has a weighting of % in the DAX. False, the maximum weighting a company can have in the DAX is 10 %. The current weighting of Daimler AG can be found on the website of Deutsche Börse AG. Technological 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 have gained in value. Individual companies can nevertheless 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 promotion to the DAX to a football club s promotion to 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 companies promoted to the DAX? Investment companies offering passive investment products such as index funds or index certificates must buy shares in 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: the ability to generate a stock index and to calculate its 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 (roadster producer) 2. Sunglasses AG (sunglasses producer) 3. Mayländer AG (brake discs producer) 4. Trend Handy AG ( mobile phone producer) 5. Rent AG (car dealership) 6. Hetschel AG (racing equipment producer) 7. Grip Cars AG (tyre and door handle producer) 8. Solar Universe AG (solar panel producer) 9. Stuttgart Studios AG (film producer) 10. Immer Sicher AG (airbag producer) 11. Schorndorfer Mineralwasser AG (drink producer) 12. LKW AG (truck producer) 13. Sitzkomfort AG (car seat producer) 14. Always Safety AG (seat belt producer) 15. Mach1 AG (car rim producer) 1, 3, 5, 6, 7, 10, 12, 13, 14 and 15.

4 2.2 Calculate market capitalisation and weighting. The automotive index comprises 10 companies. The index designer has set a limit of 20 % as the maximum weighting for a company. Calculate the missing market capitalisation and the weighting of the individual companies. Finally check whether the maximum weighting limitations have been maintained. Name Share price (EUR) Number of shares Market capitalisation (EUR) Weighting ( %) 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 capitalisation (market value): share price * number of shares (e. g. for Luxury Automobile AG) = 3.00 EUR * 60 million = 180,000, EUR Calculating weighting 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 weighting cap of 20 %. 2.3 Additional 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, Indications 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 digits after the comma. 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 capitalisation of each company * weighting 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 capitalisation at the end of the first business day divided by 120,500 leads to the index level at the end of the first business day. 121,486, EUR / 120,500 = 1, points 3. Technical skills: the ability to distinguish between the DAX performance index and the DAX price index 3.1 There is a significant difference between the level of the DAX performance index and that of the DAX price 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 price index to be higher than the DAX performance index? Explain your answer. No, the inclusion of dividend payments means that the level of the DAX performance index will be higher than that of the DAX price index.

7 Ideas on assignments using the internet Beginner s exercises Exercise 1: Encourage students to look for additional indices besides the DAX, MDAX, TecDAX, and the Dow Jones Industrial Average on the Internet or in newspapers. Thenafter the students should work out and interpret the composition of these indices. Exercise 2: After clarifying the functioning of indices, teachers have an opportunity to creatively challenge their students. The students should form groups, and each group should identify independently which construction and composition is practicable for each index.

8 Main exercise Exercise 1: Divide the students into small groups. The following article addresses the extreme changes in the value of Volkswagen common stock in late The students should read the article and then explain in detail the causes of such a dramatic distortion in the index level. Manager Magazin from 29th October 2008 Price explosion Stock exchange reduces the weighting of VW in the DAX Deutsche Börse has reacted to the recent explosion in the price of VW common stock and reduced the weighting in the DAX. The index manager Stoxx also lowered the weighting in the Euro STOXX 50. Deutsche Börse s sudden adjustment was a reaction to massive pressure from investors who thought the DAX was being turned upside down by VW. Frankfurt am Main In an extraordinary adjustment of the most important German stock index, Deutsche Börse decided on Tuesday that Volkswagen common stock should have a maximum weighting of ten percent at the opening of trade on Monday. The exchange consequently responded after the close of trading in the U.S. to the extreme rise in VW shares. The VW dilemma: With the explosion in its price, the weighting of the stock in the DAX jumped to 27 percent, with the result that VW shares determined the movement of the DAX. Deutsche Börse has now decided that, starting Monday, VW s weighting in the DAX will be reduced to 10 percent. The index manager Stoxx also lowered the weighting. At the close of trade on Tuesday evening, Volkswagen s weighting in the DAX was 27 percent. With a share price of more than 1,000 Euros, the group was for a while the most valuable company in the world. The index manager Stoxx also decided on Tuesday evening to reduce Volkswagen s weighting in its indices such as Euro Stoxx 50. Stoxx assumes that for calculations from Friday onward the freely tradable shares of Volkswagen common stock will contribute only 37 percent rather than the almost 50 percent previously. Although the indices are usually reexamined only at the end of the quarter, the company s board decided to make an exception. Euro Stoxx is the most important index in the euro zone.

9 Remarks: On 28th October 2008 Volkswagen common stocks rose from 500 Euros at the beginning of trading to Euros at the end of trading. The highest price was 1, Euros. The sharp increase led to a 27 % weighting of Volkswagen common stocks in the DAX performance index. Consequently the development of the DAX was primarily influenced by the performance of Volkswagen common stocks. In its Guidelines on the stock indices of the Deutsche Börse, Deutsche Börse AG, the license holder of the DAX, allows a company s weighting to be capped at 10 % only every quarter. This ca is imposed after the third Friday in the last month of the quarter. The Deutsche Börse AG could thus have limited VW s weighting 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 readjustment of the DAX. In a statement to the press on 28th October 2008, Deutsche Börse announced an earlier readjustment of the index from 3rd 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 weighting of the DAX index on Tuesday, 28th October The weighting cap of 10 percent for shares of Volkswagen AG provided for in the index guidelines, which would normally occur later will now be advanced to the beginning of trade on the coming Monday (3rd November 2008). The weighting 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 weighting of 27 percent. With this capping, the weighting of the remaining DAX constituents will also change. The basis for the new calculation will be the final Xetra prices on the coming Friday, 31st October The next scheduled date for an adjustment of the index is 22nd 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.