Quote-driven, Order-driven, and Brokered Markets
Quote-Driven Markets/Over-the-Counter (OTC) Markets In quote-driven markets, customers trade at prices quoted by dealers that generally work for commercial banks, investment banks, broker-dealers, or trading houses. Most trades in these markets are conducted through proprietary computer communications networks or by…
Characteristics of a Well-functioning Financial System
A well-functioning financial system has complete markets with effective financial intermediaries and financial instruments allowing: The characteristics of a good financial systems include: Practice Financial System Questions with Our Free Trial. Financial intermediaries create effective markets by: A sound financial…
Objectives of Market Regulation
The objectives of market regulation are to control fraud, control agency problems, promote fairness, set mutually beneficial standards, prevent undercapitalized financial firms from making excessively risky investments, and ensure that long-term liabilities are funded. Control Fraud: Market regulators put systems…
Security Market Index
A security market index represents a given security market, market segment, or asset class, usually constructed as portfolios of marketable securities, known as constituent securities. Indexes help investors track performance and risk, benchmark active managers, and invest in broad markets…
Price Return and Total Return of an Index
Index Value The formula for calculating the value of a price return index is as follow: $$ V_{PRI} = \frac{ \sum_{i=1}^{N}{n_iP_i} } { D } $$ Where: VPRI = the value of the price return index ni = the number…
Issues in Index Construction
Index providers generally take a top-down approach to constructing a portfolio by defining: Practice Index Construction Questions with Our Free Trial. Target Market Depending on the index, the target market may be defined broadly or narrowly based on asset class,…
Weighting Methods Used in Index Construction
There is no perfect index weighting method as each one has its own strengths and weaknesses. Price Weighting In price-weighted indices, an equal number of shares of each security is purchased, and the beginning divisor is usually set to the…
The Value and Return of an Index
Every index weighting method has a formula that calculates the weighting of a given constituent security within an index. For the following examples, the same portfolio of three securities will be used to help illustrate the weighting methods. Note that…
Rebalancing and Reconstitution of an Index
Index managers must consider when the index should be rebalanced and when the security selection and weighting decisions should be re-examined. Rebalancing Rebalancing refers to adjusting the weights of the constituent securities in the index on a regularly scheduled basis…
Security Market Indices
The primary uses of market indices are to (1) gauge market sentiments, (2) serve as proxies for measuring returns and risk, (3) serve as proxies for asset classes, (4) benchmark active managers, and (5) model portfolios for index funds and…
