A 

stock market or equity market is a public market (a loose network of economic transactions, not a physical facility or

discrete entity) for the trading of company stock (shares) and derivatives at an agreed price; these aresecurities listed on

a stock exchange as well as those only traded privately.

The size of the world stock market was estimated at about $36.6 trillion US at the beginning of October 2008.
[1]
The total world derivatives market has been estimated at about $791 trillion face or nominal value,[2] 11 times the size of

the entire world economy.[3] The value of the derivatives market, because it is stated in terms ofnotional values, cannot be

directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Moreover, the vast

majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable

derivative 'bet' on the event not occurring). Many such relatively illiquid securities are valued as marked to model, rather

than an actual market price.

The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organizationspecialized in

the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together. The largest

stock market in the United States, by market cap, is the New York Stock Exchange, NYSE. In Canada, the largest stock

market is the Toronto Stock Exchange. Major European examples of stock exchanges include the London Stock

Exchange, Paris Bourse, and the Deutsche Börse. Asian examples include the Tokyo Stock Exchange, the Hong Kong

Stock Exchange, the Shanghai Stock Exchange, and the Bombay Stock Exchange. In Latin America, there are such

exchanges as the BM&F Bovespa and the BMV.

Trading

Participants in the stock market range from small individual stock investors to large hedge fund traders,
who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who
executes the order.

Some exchanges are physical locations where transactions are carried out on a trading floor, by a method
known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where
traders may enter "verbal" bids and offers simultaneously. The other type of stock exchange is a virtual
kind, composed of a network of computers where trades are made electronically via traders.

Actual trades are based on an auction market model where a potential buyer bids a specific price for a
stock and a potential seller asks a specific price for the stock. (Buying or selling at market means you will
accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale
takes place, on a first-come-first-served basis if there are multiple bidders or askers at a given price.

The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers,
thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the
listed securities, facilitating price discovery.
The New York Stock Exchange is a physical exchange, also referred to as a listed exchange — only stocks listed with the

exchange may be traded. Orders enter by way of exchange members and flow down to a floor broker, who goes to the floor

trading post specialist for that stock to trade the order. The specialist's job is to match buy and sell orders using open outcry.

If a spreadexists, no trade immediately takes place--in this case the specialist should use his/her own resources (money or

stock) to close the difference after his/her judged time. Once a trade has been made the details are reported on the "tape"

and sent back to the brokerage firm, which then notifies the investor who placed the order. Although there is a significant

amount of human contact in this process, computers play an important role, especially for so-called "program trading".

The NASDAQ is a virtual listed exchange, where all of the trading is done over a computer network. The process is similar to

the New York Stock Exchange. However, buyers and sellers are electronically matched. One or more NASDAQ market

makers will always provide a bid and ask price at which they will always purchase or sell 'their' stock.[4]

The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange. It was automated in the late 1980s.

Prior to the 1980s, it consisted of an open outcry exchange. Stockbrokers met on the trading floor or the Palais Brongniart.

In 1986, the CATS trading systemwas introduced, and the order matching process was fully automated.

From time to time, active trading (especially in large blocks of securities) have moved away from the 'active' exchanges.

Securities firms, led by UBS AG, Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12 percent of U.S.

security trades away from the exchanges to their internal systems. That share probably will increase to 18 percent by 2010

as more investment banks bypass the NYSE and NASDAQ and pair buyers and sellers of securities themselves, according

to data compiled by Boston-based Aite Group LLC, a brokerage-industry consultant.[5]

Now that computers have eliminated the need for trading floors like the Big Board's, the balance of power in equity markets

is shifting. By bringing more orders in-house, where clients can move big blocks of stock anonymously, brokers pay the

exchanges less in fees and capture a bigger share of the $11 billion a year that institutional investors pay in trading

commissions as well as the surplus of the century had taken place.[citation needed].

Market participants

A few decades ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, with long family

histories (and emotional ties) to particular corporations. Over time, markets have become more "institutionalized"; buyers

and sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds, index funds, exchange-traded

funds, hedge funds, investor groups, banks and various other financial institutions). The rise of the institutional investor has

brought with it some improvements in market operations. Thus, the government was responsible for "fixed" (and exorbitant)

fees being markedly reduced for the 'small' investor, but only after the large institutions had managed to break the brokers'

solid front on fees. (They then went to 'negotiated' fees, but only for large institutions.[citation needed])

However, corporate governance (at least in the West) has been very much adversely affected by the rise of (largely

'absentee') institutional 'owners'.[citation needed]

History

In 12th century France the courratiers de change were concerned with managing and regulating the debts
of agricultural communities on behalf of the banks. Because these men also traded with debts, they could
be called the first brokers. A common misbelief is that in late 13th centuryBruges commodity traders
gathered inside the house of a man called Van der Beurze, and in 1309 they became the "Brugse
Beurse", institutionalizing what had been, until then, an informal meeting, but actually, the family Van der
Beurze had a building in Antwerp where those gatherings occurred;[6] the Van der Beurze had Antwerp,
as most of the merchants of that period, as their primary place for trading. The idea quickly spread
around Flanders and neighboring counties and "Beurzen" soon opened in Ghent and Amsterdam.

In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351 the
Venetian government outlawed spreading rumors intended to lower the price of government funds.
Bankers in Pisa, Verona, Genoa and Florence also began trading in government securities during the
14th century. This was only possible because these were independent city states not ruled by a duke but
a council of influential citizens. The Dutch later started joint stock companies, which
let shareholders invest in business ventures and get a share of their profits - or losses. In 1602, the Dutch
East India Company issued the first share on theAmsterdam Stock Exchange. It was the first company to
issue stocks and bonds.

The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first stock exchange
to introduce continuous trade in the early 17th century. The Dutch "pioneered short selling, option trading,
debt-equity swaps, merchant banking, unit trusts and other speculative instruments, much as we know
them".[7] There are now stock markets in virtually every developed and most developing economies, with
the world's biggest markets being in the United States, United
Kingdom, Japan, India, China, Canada, Germany, France, South Korea and the Netherlands.[8]

Importance of stock market

Function & Purpose

The stock market is one of the most important sources for companies to raise money. This allows
businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership
of the company in a public market. The liquidity that an exchange provides affords investors the ability to
quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other
less liquid investments such as real estate.

History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and

can influence or be an indicator of social mood. An economy where the stock market is on the rise is considered to be an

up-and-coming economy. In fact, the stock market is often considered the primary indicator of a country's economic strength
and development. Rising share prices, for instance, tend to be associated with increased business investment and vice

versa. Share prices also affect the wealth of households and their consumption. Therefore, central bankstend to keep an

eye on the control and behavior of the stock market and, in general, on the smooth operation of financial system functions.

Financial stability is the raison d'être of central banks.

Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver the shares, and

guarantee payment to the seller of a security. This eliminates the risk to an individual buyer or seller that

the counterparty could default on the transaction.

The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the

production of goods and services as well as employment. In this way the financial system contributes to increased

prosperity. An important aspect of modern financial markets, however, including the stock markets, is absolute discretion.

For example, American stock markets see more unrestrained acceptance of any firm than in smaller markets. For example,

Chinese firms that possess little or no perceived value to American society profit American bankers on Wall Street, as they

reap large commissions from the placement, as well as the Chinese company which yields funds to invest in China.

However, these companies accrue no intrinsic value to the long-term stability of the American economy, but rather only

short-term profits to American business men and the Chinese; although, when the foreign company has a presence in the

new market, this can benefit the market's citizens. Conversely, there are very few large foreign corporations listed on the

Toronto Stock Exchange TSX, Canada's largest stock exchange. This discretion has insulated Canada to some degree to

worldwide financial conditions. In order for the stock markets to truly facilitate economic growth via lower costs and better

employment, great attention must be given to the foreign participants being allowed in.[citation needed]

Relation of the stock market to the modern financial system

The financial systems in most western countries has undergone a remarkable transformation. One feature of this

development isdisintermediation. A portion of the funds involved in saving and financing, flows directly to the financial

markets instead of being routed via the traditional bank lending and deposit operations. The general public's heightened

interest in investing in the stock market, either directly or through mutual funds, has been an important component of this

process.

Statistics show that in recent decades shares have made up an increasingly large proportion of households' financial assets

in many countries. In the 1970s, in Sweden, deposit accounts and other very liquid assets with little risk made up almost 60

percent of households' financial wealth, compared to less than 20 percent in the 2000s. The major part of this adjustment

in financial portfolios has gone directly to shares but a good deal now takes the form of various kinds of institutional

investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds, insurance investment of premiums, etc.

The trend towards forms of saving with a higher risk has been accentuated by new rules for most funds and insurance,

permitting a higher proportion of shares to bonds. Similar tendencies are to be found in other industrialized countries. In all

developed economic systems, such as the European Union, the United States, Japan and other developed nations, the
trend has been the same: saving has moved away from traditional (government insured) bank deposits to more risky

securities of one sort or another.

The stock market, individual investors, and financial risk

Riskier long-term saving requires that an individual possess the ability to manage the associated increased risks. Stock

prices fluctuate widely, in marked contrast to the stability of (government insured) bank deposits or bonds. This is something

that could affect not only the individual investor or household, but also the economy on a large scale. The following deals

with some of the risks of the financial sector in general and the stock market in particular. This is certainly more important

now that so many newcomers have entered the stock market, or have acquired other 'risky' investments (such as

'investment' property, i.e., real estate and collectables).

With each passing year, the noise level in the stock market rises. Television commentators, financial writers, analysts, and

market strategists are all overtaking each other to get investors' attention. At the same time, individual investors, immersed

in chat rooms and message boards, are exchanging questionable and often misleading tips. Yet, despite all this available

information, investors find it increasingly difficult to profit. Stock prices skyrocket with little reason, then plummet just as

quickly, and people who have turned to investing for their children's education and their own retirement become frightened.

Sometimes there appears to be no rhyme or reason to the market, only folly.

This is a quote from the preface to a published biography about the long-term value-oriented stock investor Warren Buffett.
[9]
 Buffett began his career with $100, and $100,000 from seven limited partners consisting of Buffett's family and friends.

Over the years he has built himself a multi-billion-dollar fortune. The quote illustrates some of what has been happening in

the stock market during the end of the 20th century and the beginning of the 21st century.

The behavior of stock market

From experience we know that investors may 'temporarily' move financial prices away from their long
term aggregate price 'trends'. (Positive or up trends are referred to as bull markets; negative or down
trends are referred to as bear markets.) Over-reactions may occur—so that excessive optimism
(euphoria) may drive prices unduly high or excessive pessimism may drive prices unduly low. Economists
continue to debate whether financial markets are 'generally' efficient.

According to one interpretation of the efficient-market hypothesis (EMH), only changes in fundamental

factors, such as the outlook for margins, profits or dividends, ought to affect share prices beyond the short
term, where random 'noise' in the system may prevail. (But this largely theoretic academic viewpoint—
known as 'hard' EMH—also predicts that little or no trading should take place, contrary to fact, since
prices are already at or near equilibrium, having priced in all public knowledge.) The 'hard' efficient-market
hypothesis is sorely tested by such events as the stock market crash in 1987, when the Dow Jones
index plummeted 22.6 percent—the largest-ever one-day fall in the United States. This event
demonstrated that share prices can fall dramatically even though, to this day, it is impossible to fix a
generally agreed upon definite cause: a thorough search failed to detect any 'reasonable' development
that might have accounted for the crash. (But note that such events are predicted to occur strictly
by chance , although very rarely.) It seems also to be the case more generally that many price
movements (beyond that which are predicted to occur 'randomly') are not occasioned by new information;
a study of the fifty largest one-day share price movements in the United States in the post-war period
seems to confirm this.[10]
However, a 'soft' EMH has emerged which does not require that prices remain at or near equilibrium, but only that market
participants not be able to systematically profit from any momentary market 'inefficiencies'. Moreover, while EMH predicts
that all price movement (in the absence of change in fundamental information) is random (i.e., non-trending), many studies
have shown a marked tendency for the stock market to trend over time periods of weeks or longer. Various explanations for
such large and apparently non-random price movements have been promulgated. For instance, some research has shown
that changes in estimated risk, and the use of certain strategies, such as stop-loss limits and Value at
Risk limits, theoretically could cause financial markets to overreact. But the best explanation seems to be that the
distribution of stock market prices is non-Gaussian (in which case EMH, in any of its current forms, would not be strictly
applicable).[11][12]

Other research has shown that psychological factors may result in exaggerated (statistically anomalous)

stock price movements (contrary to EMH which assumes such behaviors 'cancel out'). Psychological
research has demonstrated that people are predisposed to 'seeing' patterns, and often will perceive a
pattern in what is, in fact, just noise. (Something like seeing familiar shapes in clouds or ink blots.) In the
present context this means that a succession of good news items about a company may lead investors to
overreact positively (unjustifiably driving the price up). A period of good returns also boosts the investor's
self-confidence, reducing his (psychological) risk threshold.[13]

Another phenomenon—also from psychology—that works against an objective assessment is group

thinking. As social animals, it is not easy to stick to an opinion that differs markedly from that of a majority
of the group. An example with which one may be familiar is the reluctance to enter a restaurant that is
empty; people generally prefer to have their opinion validated by those of others in the group.

In one paper the authors draw an analogy with gambling.[14] In normal times the market behaves like a
game of roulette; the probabilities are known and largely independent of the investment decisions of the
different players. In times of market stress, however, the game becomes more like poker (herding
behavior takes over). The players now must give heavy weight to the psychology of other investors and
how they are likely to react psychologically.

The stock market, as with any other business, is quite unforgiving of amateurs. Inexperienced investors
rarely get the assistance and support they need. In the period running up to the 1987 crash, less than 1
percent of the analyst's recommendations had been to sell (and even during the 2000 - 2002 bear market,
the average did not rise above 5%). In the run up to 2000, the media amplified the general euphoria, with
reports of rapidly rising share prices and the notion that large sums of money could be quickly earned in
the so-called new economy stock market. (And later amplified the gloom which descended during the
2000 - 2002 bear market, so that by summer of 2002, predictions of a DOW average below 5000 were
quite common.)

1.8 The Role of Stock Exchange

Stock exchanges have multiple roles in the economy, this may include the following:

 Raising capital for businesses

The Stock Exchange provides companies with the facility to raise capital for
expansion through selling shares to the investing public.

 Mobilizing savings for investment

When people draw their savings and invest in shares, it leads to a more rational
allocation of resources because funds, which could have been consumed, or
kept in idle deposits with banks, are mobilized and redirected to promote
business activity with benefits for several economic sectors such as agriculture,
commerce and industry, resulting in stronger economic growth and higher
productivity levels and firms.

 Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines, increase
distribution channels, hedge against volatility, increase its market share, or
acquire other necessary business assets. A takeover bid or a merger agreement
through the stock market is one of the simplest and most common ways for a
company to grow by acquisition or fusion.

 Profit sharing
 Both casual and professional stock investors, through dividends and stock price
increases that may result in capital gains, will share in the wealth of profitable
businesses.

 Corporate governance
By having a wide and varied scope of owners, companies generally tend to
improve on their management standards and efficiency in order to satisfy the
demands of these shareholders and the more stringent rules for public
corporations imposed by public stock exchanges and the government.
Consequently, it is alleged that public companies (companies that are owned by
shareholders who are members of the general public and trade shares on public
exchanges) tend to have better management records than privately-held
companies (those companies where shares are not publicly traded, often owned
by the company founders and/or their families and heirs, or otherwise by a small
group of investors). However, some well-documented cases are known where it
is alleged that there has been considerable slippage in corporate governance on
the part of some public companies.
 Creating investment opportunities for small investors
As opposed to other businesses that require huge capital outlay, investing in
shares is open to both the large and small stock investors because a person
buys the number of shares they can afford. Therefore the Stock Exchange
provides the opportunity for small investors to own shares of the same
companies as large investors.

 Government capital-raising for development projects

Governments at various levels may decide to borrow money in order to finance
infrastructure projects such as sewage and water treatment works or housing
estates by selling another category of securities known as bonds. These bonds
can be raised through the Stock Exchange whereby members of the public buy
them, thus loaning money to the government. The issuance of such bonds can
obviate the need to directly tax the citizens in order to finance development,
 although by securing such bonds with the full faith and credit of the government
instead of with collateral, the result is that the government must tax the citizens
or otherwise raise additional funds to make any regular coupon payments and
refund the principal when the bonds mature.

 Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, on market
forces. Share prices tend to rise or remain stable when companies and the
economy in general show signs of stability and growth. An economic recession,
depression, or financial crisis could eventually lead to a stock market crash.
Therefore the movement of share prices and in general of the stock indexes can
be an indicator of the general trend in the economy
(Source: ACCA: Financial Analysis; Pgs 36-46: Paper 2.5)

NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for
"National Association of Securities Dealers Automated Quotations," but the exchange's official stance is that the acronym is
obsolete.[1] It is the largest electronic screen-based equity securities trading market in the United States and fourth largest
by market capitalization in the world.[2] With 2906 ticker symbols,[3] it has more trading volume than any other stock exchange
in the world.[4]

History

It was founded in 1971 by the National Association of Securities Dealers (NASD), whodivested themselves of it in a series of

sales in 2000 and 2001. It is owned and operated by the NASDAQ OMX Group, the stock of which was listed on its own

stock exchange beginning July 2, 2002, under the ticker symbol NASDAQ: NDAQ. It is regulated by FINRA.

With the completed purchase of the Nordic-based operated exchange OMX, following its agreement with Borse Dubai,

NASDAQ is poised to capture 67% of the controlling stake in the aforementioned exchange, thereby inching ever closer to

taking over the company and creating a trans-atlantic powerhouse. The group, now known as Nasdaq-OMX, controls and

operates the NASDAQ stock exchange in New York City – the second largest exchange in the United States. It also

operates eight stock exchanges in Europe and holds one-third of the Dubai Stock Exchange. It has a double-listing

agreement with OMX, and will compete with NYSE Euronext group in attracting new listings.
When the NASDAQ stock exchange began trading on February 8, 1971, the NASDAQ was the world's first electronic stock

market. At first, it was merely a computer bulletin boardsystem and did not actually connect buyers and sellers. The

NASDAQ helped lower the spread (the difference between the bid price and the ask price of the stock) but somewhat

paradoxically was unpopular among brokerages because they made much of their money on the spread.

NASDAQ was the successor to the over-the-counter (OTC) system of trading. As late as 1987, the NASDAQ exchange was

still commonly referred to as the OTC in media and also in the monthly Stock Guides issued by Standard & Poor's

Corporation.

Over the years, NASDAQ became more of a stock market by adding trade and volume reporting and automated trading

systems. NASDAQ was also the first stock market in the United States to advertise to the general public, highlighting

NASDAQ-traded companies (usually in technology) and closing with the declaration that NASDAQ is "the stock market for

the next hundred years." Its main index is the NASDAQ Composite, which has been published since its inception. However,

its exchange-traded fund tracks the large-cap NASDAQ-100 index, which was introduced in 1985 alongside the NASDAQ

100 Financial Index.

Until 1987, most trading occurred via the telephone, but during the October 1987 stock market crash, market makers often

didn't answer their phones. To counteract this, the Small Order Execution System (SOES) was established, which provides

an electronic method for dealers to enter their trades. NASDAQ requires market makers to honor trades over SOES.

In 1992, it joined with the London Stock Exchange to form the first intercontinental linkage of securities markets. NASDAQ's

1998 merger with the American Stock Exchange formed the NASDAQ-Amex Market Group, and by the beginning of the 21st

century it had become the largest electronic stock market (in terms of both dollar value and share volume) in the United

States. NASD spun off NASDAQ in 2000 to form a publicly traded company, the NASDAQ Stock Market, Inc.

On November 8, 2007, NASDAQ bought the Philadelphia Stock Exchange (PHLX) for US$652 million. PHLX is the oldest

stock exchange in America—having been in operation since 1790.

To qualify for listing on the exchange, a company must be registered with the SEC, have at least three market

makers (financial firms that act as brokers or dealers for specific securities) and meet minimum requirements for assets,

capital, public shares, and shareholders.

Quote availability

NASDAQ quotes are available at three levels:

 Level 1 shows the highest bid and lowest offer — the inside quote.

 Level 2 shows all public quotes of market makers together with information of market makers wishing to sell or buy

stock and recently executed orders.[5]

 Level 3 is used by the market makers and allows them to enter their quotes and execute orders.
[edit]Trading schedule
DOW JONES
Dow Jones & Company is an American publishing and financial information firm.

The company was founded in 1882 by three reporters: Charles Dow, Edward Jones, and Charles Bergstresser. Like The

New York Times and the Washington Post, the company was in recent years publicly traded but privately controlled. The

company was led by the Bancroft family, which effectively controlled 64% of all voting stock, before being acquired by News

Corporation. In 2010, the company sold 90% of Dow Jones Indexes to the CME Group, including the Dow Jones Industrial

Average.

The company became a subsidiary of News Corporation after an extended takeover bid during 2007.[2] It was reported on

August 1, 2007 that the bid had been successful[3][4] after an extended period of uncertainty about shareholder agreement[5].

The transaction was completed on December 13, 2007. It was worth US$5 billion or $60 a share, giving NewsCorp control

of The Wall Street Journal and ending the Bancroft family's 105 years of ownership[6]

Consumer Media

Its flagship publication, The Wall Street Journal, is a daily newspaper in print and online covering
business, financial national and international news and issues around the globe. It began publishing on
July 8, 1889. Other editions of the Journal include:

 The Wall Street Journal Asia covering news and business in Asia and around the world;
 The Wall Street Journal Europe covering news and business in Europe and around the world;
 The Wall Street Journal Special Editions, publishing translations of articles for inclusion in local
newspapers, notably in Latin America.

Other consumer-oriented publications of Dow Jones include Barron's Magazine, a weekly overview of the
world economy and markets; MarketWatch.com, the online financial news site; the monthly journal Far
Eastern Economic Review; and the consumer magazineSmartMoney in conjunction with the Hearst
Corporation.
ndices

Dow Jones sold a 90% stake in its Index business for $607.5M to Chicago-based CME Group in February 2010.[7] A few of

the most widely used include:

 Dow Jones Industrial Average (DJIA, "Dow 30", or often simply "The Dow")

 Dow Jones Transportation Average

 Dow Jones Utility Average

 Dow Jones Composite Average

 The Global Dow

 Dow Jones Global Titans 50 Index

 Dow Jones Total Stock Market Index

 Dow Jones Sustainability Indexes

 Dow Jones-UBS Commodity Indexes

 Dow Jones Target Date Indexes

Ownership
The Bancroft family and heirs of Clarence W. Barron once effectively controlled the company class B
shares, each with a voting power of ten regular shares, prior to its sale to News Corp. At one time, they
controlled 64% of Dow Jones voting stock.[8]

[edit]Buyout offer
On May 1, 2007, Dow Jones released a statement confirming that News Corporation, led by Rupert
Murdoch, had made an unsolicited offer of $60 per share, or $5 billion, for Dow Jones.[9] Stock was briefly
halted for pending press release. The halt lasted under 10 minutes while CNBC was receiving data. It has
been suggested that the buyout offer is related to Murdoch's new cable business news channel Fox
Business that launched in 2007. The Dow Jones brand brings instant credibility to the project.[10]

On June 6, 2007, CEO Brian Tierney of Philadelphia Media Holdings L.L.C., owning company of The
Philadelphia Inquirer, Philadelphia Daily News, and Philly.com, went public in an article on Philly.com
expressing interest in "joining with outside partners to buy Dow Jones." Tierney said, "We would
participate as Philadelphia Media Holdings, along with other investors. We wouldn't do it alone." [11]

In June, MySpace founder Brad Greenspan put forth a bid to buy 25% of the Dow for $60 a share, the
same price per share as News Corporation's bid. Greenspan's offer was for $1.25 billion for 25% of the
company.[12]

On July 17, 2007, The Wall Street Journal, a unit of Dow Jones, reported that the company and News
Corporation have agreed in principle on a US$5 billion takeover and that the offer will be put to the full
Dow Jones board on the same evening in New York. The offer values the company at 70% more than the
company's market value.[13]

"Our strategy centers around leaving the print publications of Dow Jones intact to continue serving as the
gold standard of financial reporting, and creating additional earnings streams through digital media
initiatives that can produce a stock price above 100 dollars a share,
 For too long, Dow Jones has limited its focus to the world of print media and allowed other, less
established entities to generate millions of dollars in profits by developing financial reporting franchises on
the Internet and cable television.

The time has come for Dow Jones to break out of its slumber and extend its dominance into the lucrative
arena of digital media."
—Channel News Asia Business Section—
http://www.channelnewsasia.com/stories/afp_world_business/view/289501/1/.html

[edit]Insider trading scandal

Upon investigating suspicious share price movements in the run-up to the announcement, the SEC
alleged that board member Sir David Li, one of Hong Kong's most prominent businessmen, had informed
his close friend and business associate Michael Leung of the impending offer. Leung had acted on this
information by telling his daughter and son-in-law, who reaped a US$8.2 million profit from the
transaction.[1
A leader in news and business information world-wide, Dow Jones is newswires, Web sites, newspapers, newsletters,
databases, magazines, radio and television. Our publications inform the discussions and decisions of the world while our
databases make the business world more transparent. We develop technology to transform information into insight. From 58
countries and in a dozen languages, we inspire audiences with authoritative, differentiated and trusted content.

For the Individual

Dow Jones offers business and financial information to the individual reader around the globe. Its publications and Web sites
are some of the best known and most respected brands, regularly engaging more than 42 million readers worldwide.

 The Wall Street Journal is the largest national daily newspaper in the U.S. and its award-winning journalists
have garnered 33 Pulitzer Prizes through the years. It employs more than 2,000 journalists reporting in 58 countries.
 The Wall Street Journal Digital Network consists of WSJ.com, MarketWatch.com, Barrons.com and
AllThingsD.com. WSJ.com is the largest paid subscription news site on the Internet.
 International editions of The Wall Street Journal include The Wall Street Journal Europe and The Wall Street
Journal Asia. Dow Jones also publishes The Wall Street Journal Special Editions, a collection of The Wall Street
Journal's pages published in 39 newspapers in 49 countries.
 Other channels of distribution and publications include: television, radio/audio, online video, consumer
electronic licensing and The Wall Street Journal Classroom, Campus and Sunday editions. In
addition,eFinancialNews Holdings Ltd., based in London, serves the European financial services industry with print,
online, training and events businesses.
 Barron’s is a weekly magazine that caters to financial professionals, individual investors and others interested
in financial markets.

For the Enterprise

Dow Jones provides high value, hard-to-find, premium content that businesses and financial services firms demand,
including real-time news, research, aggregated content and information solutions. It creates targeted products and services
specifically for professionals in Wealth Management, Investment Banking, Investment Management, Sales & Trading,
Researchers & Knowledge Workers, Public Relations & Corporate Communications, Private Markets, Risk & Compliance
and Energy & Commodities.

 Dow Jones Factiva is the leading provider of global business news and information with content from more
than 28,000 sources, from 157 countries in 23 languages.
 Dow Jones Newswires is a premier provider of real-time business news and information to approximately
438,000 financial professionals around the world. In addition to a dedicated staff of approximately 900 journalists, it
draws on the global resources of The Wall Street Journal and Agence France-Presse.
 Dow Jones VentureSource is a database of over 43,000 venture-backed companies and over 11,000 private
capital firms across the U.S., Europe, Israel and China.
 Dow Jones Companies & Executives is a database of more than 18 million companies and 36 million
executives around the world.
 Dow Jones Reprint Portal helps you manage client communications and publishing needs with reprints and
transactional licensing services from trusted sources like The Wall Street Journal, Barron's, Associated Press,
American Banker, SmartMoney and many more.
 Other specialized products and services include Dow Jones Insight, Dow Jones Watchlist, Dow Jones LP
Source, Dow Jones Events and Dow Jones Investment Banker.

Dow Jones Local Media Group

Dow Jones Local Media Group includes eight daily and 14 weekly franchises that are distinguished by award-winning
journalism and products crafted for the interests and needs of their communities. Operating in seven states with a Sunday
circulation of more than 300,000 readers, we also publish quality lifestyle magazines and a specialized business digest.
Each local media franchise is autonomous, investing responsibility in local management to serve its region best.
Dow Jones & Company is a subsidiary of News Corporation (NASDAQ: NWS, NWSA; ASX: NWS,
NWSLV;www.newscorp.com).

DOW HISTORY

From a niche news agency in an obscure Wall Street basement to a global news and business-
information leader, the vision at Dow Jones & Company has been consistent and defining for more than a
century. Excellence, integrity and innovation are the qualities which started the company in 1882, which
sustained its growth in the 20th Century and which guide its progress as it pioneers new approaches to
business and journalism in the digital age.

1882-1902 – Founders and Foundation

The foundation for success is laid by Charles Dow, Edward Jones and Charles Bergstresser who over
two decades conceive and commence three products which define Dow Jones and financial
journalism: The Wall Street Journal, Dow Jones Newswires and the Dow Jones Industrial Average. The
founders state their commitment to excellence in the Journal’s first issue: “We appreciate the confidence
reposed in our work. We mean to make it better.”

1882

Dow, Jones & Company’s first product is brief news bulletins hand-delivered throughout the day to traders
at the stock exchange. Those "flimsies" as they are called later are aggregated in a printed daily summary
called the "Customer's Afternoon Letter."

1889

The first edition of The Wall Street Journal is published July 8. An afternoon newspaper, it covers four
pages and sells for two cents.

1896

The Dow Jones Industrial Average is officially launched. 

1897
The Ticker, the real-time newswire and the fundamental source for news in the investment community, is
announced.

1898

The Journal, now six pages, adds a morning edition.  

1899

The Journal's "Review & Outlook" column, which still runs in the Journal today, appears for the first time.
It initially was written by Charles Dow.

Back to Top
1902 – 1941 – Professionals and Progress

Dow Jones is acquired in 1902 by the leading financial journalist of the day, Clarence Barron. Over the
next 30 years, Barron recruits and develops a generation of journalists who further Dow Jones’s
reputation for excellence. Those journalists would lead the company successfully through the Great
Depression and into a new era of prosperity and progress.

1921

Barron’s, America’s premier financial weekly, is founded; its first editor is Clarence Barron.

1926
A motor-driven version of the "Ticker" – a key innovation in the delivery of real-time news – was
developed by the Dow Jones engineering department.

1929

The first issue of the Pacific Coast Edition of the Journal rolls off the presses on Oct. 21, eight days
before the great stock-market crash.

1930

Dow Jones is incorporated in New York.  It is now known as Dow Jones & Company after the comma is
dropped from the former Dow, Jones & Company.

1934
Afternoon edition of the Journal ceases.

Chief Executive Officer Casey Hogate begins a series of changes during the next decade that ultimately
result in the metamorphosis of the Journal into a new kind of daily newspaper. One of these changes is
advent of the "What's News" column. Created by Bernard “Barney” Kilgore, that column was the first
major summary of the news, a precursor to omnipresent summaries and digests on the Internet today.

Back to Top
1941-1967 – The Journal’s Genius

Barney Kilgore takes over as managing editor of the Journal in 1941 and as CEO of Dow Jones in 1945,
setting the company on a new and revolutionary course. In print, Dow Jones isn’t satisfied reporting “what
happened”; our publications redefine journalism to include “what it means.” In business, the Journal would
harness new technologies such as microwaves to open new markets to readers in distant cities.

1947
The Journal wins its first Pulitzer Prize for editorials by William Henry Grimes.

1948

The Journal launches a Southwest edition

1950

The Journal launches a Midwest edition

1953

When the New York Stock Exchange cancels its Saturday trading session, the Journal ceases publication
of a Saturday edition

1962

Making innovative use of microwave technology, Dow Jones is able to reproduce newspaper pages by
facsimile over long distances – a vital step toward a truly national newspaper

1966

Now with regional editions spanning the U.S., the Journal counts more than one million subscribers for
the first time.

Back to Top
1967–2007 – Innovation and Globalization

Innovation would define Dow Jones in the 40 years after Kilgore’s death in 1967 as the news moved into
space and online. Dow Jones pioneered the use of satellites to transmit newspaper pages and make
possible a daily newspaper on truly national scale. A decade before the Internet, Dow Jones was storing
and coding its news digitally so that it could be accessed online. Factiva’s content and technology tools
set the standard for innovation and quality in the news and information industry. The Journal, Newswires
and Dow Jones Indexes built successful franchises in Europe and Asia.

1967

Dow Jones Newswires begins a major expansion outside the U.S. that ultimately puts journalists in every
major financial center in Europe, Asia, Latin America, Australia and Africa.

1970

Dow Jones buys the Ottaway newspaper chain, which at the time comprised nine dailies and three
Sunday newspapers.

1971

A joint venture with Bunker Ramo is the advent of electronic delivery of news from Dow Jones Newswires
in an age before personal computers. It would also mark the company’s pioneering efforts to store news
and information electronically, a business that would evolve into Factiva.

1976

The Asian Wall Street Journal is launched.

1983
The Wall Street Journal Europe is launched.

1995

The initial version of the WSJ.com appears online. Content won’t be all that distinguishes the Journal on
the Web. Dow Jones insists that its differentiated content is worth paying for and thus built the Internet’s
most successful paid news Web site.

1997

The Dow Jones Industrial Average is licensed for the first time, setting in motion a successful new
business called Dow Jones Indexes.

2005

MarketWatch is acquired, adding a key component to what will become the Wall Street Journal Digital
Network

The Journal resumes publication on Saturday with the debut of Weekend Edition.

2006

Factiva is acquired, extending the suite of business-to-business products in what later will become the
Dow Jones Enterprise Media Group.

2007

Dow Jones is acquired by News Corp., the world’s most global media company.

Les Hinton takes over as chief executive. Robert Thomson becomes editor-in-chief and later managing
editor of the Journal.

Back to Top
2007 and beyond – Something Bigger

News Corp. acquires Dow Jones in December 2007, and the horizons expand again. Now part of a global
media company which includes Fox, SKY, HarperCollins and newspapers from London to Sydney, Dow
Jones reinvents the Journal for a new era of news. Now the Journal covers more political and general
news along with its leading business coverage. Fresh investment delivers new game-changing business
intelligence tools as well as new markets in Europe and Asia. At a time when other media companies are
retrenching, Dow Jones is moving aggressively to build on the success of the past and to capture the
opportunity of the future.

2008

The Journal is reconceived as a more complete source of news with expanded coverage of national and
international events as well as more opinion, culture and sports.

Audiences expand. In addition to growth in paid circulation at the Journal, there are new local language
products from Newswires in Spanish, Dutch and Arabic. Newswires also expands significantly in India.

Dow Jones Indexes launches the Global Dow, a global version of the Dow Jones Industrial Average
aggregating 150 blue-chip stocks from around the world.

WSJ., the Journal’s glossy lifestyle magazine debuts world-wide.

2009

Ottaway Newspapers Inc. is renamed the Dow Jones Local Media Group.

The company moves its headquarters to midtown Manhattan where at 1211 Avenue of the Americas it
joins its sister companies at News Corp. under one roof.

3. LITERATURE REVIEW

Thomas Chinan Chiang (2009) This paper investigates statistical properties of

high-frequency intraday stock returns across various frequencies. Both time
series and panel data are employed to explore probability distribution properties,
autocorrelations, dynamic conditional correlations, and scaling analysis in the
Dow Jones Industrial Average (DJIA) and the NASDAQ intraday returns across
10-minute, 30-monute, 60-minute, 120-minute, and 390-minute frequencies from
August 1, 1997, to December 31, 2003. The evidence shows that all of the
statistical estimates are highly influenced by the opening returns that contain
overnight and non-regular information. The stylized fact of high opening returns
generates significant negative (in DJIA) and positive (in NASDAQ)
autocorrelations. After excluding the opening intervals, DJIA exhibits a pattern
similar to a random walk. While examining the AR(1)-GARCH (1, 1) pattern
across both time and frequency variants, we find consistent negative AR(1) at
10-minute and 30-minute frequencies in the DJIA, positive AR(1) in the NASDAQ
intraday returns, and no obvious pattern beyond the 30-minute intraday return
series. By examining the dynamic conditional correlation coefficients between the
DJIA and the NASDAQ at different frequencies, we find that the correlations are
positive and fluctuate mainly in the range of 0.6 to 0.8. The variance of the
correlation coefficients has been declining and appears to be stable for the post-
2001 period. We then check the conditions for a stable Levy distribution and find
both the DJIA and the NASDAQ can converge to their systematic equilibriums
after shocks, implying both systems are characterized by a self-stabilizing
mechanism.
William J. Egan (2008) This paper assesses the autocorrelation patterns in U.S.
stock market indices: the S&P 500 (1962-2007), the Dow Jones Industrial
Average (1929-2007), and the NASDAQ Composite (1972-2007). Statistically
significant lag 1 autocorrelation was observed for all three time series as tested
by Monte Carlo simulation. The autocorrelation exhibited by the S&P 500 agreed
with the findings of Lo and MacKinlay. The Dow Jones Industrial Average
displayed strong autocorrelation at lag 1 from 1940-1986 (163/182 quarters, or
87%, had a positive autocorrelation). For all but three quarters from 1972 to
1997, the NASDAQ Composite had a positive autocorrelation at lag 1 averaging
0.25. 61% of the calendar quarters during that period had statistically significant
autocorrelations at lag 1.

Anders Johansen (2001) We clarify the status of log-periodicity associated with

speculative bubbles preceding financial crashes. In particular, we address
Feigenbaum's [2001] criticism and show how it can be rebuked. Feigenbaum's
main result is as follows: "the hypothesis that the log-periodic component is
present in the data cannot be rejected at the 95% confidence level when using all
the data prior to the 1987 crash; however, it can be rejected by removing the last
year of data." (e.g., by removing 15% of the data closest to the critical point). We
stress that it is naive to analyze a critical point phenomenon, i.e., a power law
divergence, reliably by removing the most important part of the data closest to
the critical point. We also present the history of log-periodicity in the present
context explaining its essential features and why it may be important. We offer an
extension of the rational expectation bubble model for general and arbitrary risk-
aversion within the general stochastic discount factor theory. We suggest
guidelines for using log-periodicity and explain how to develop and interpret
statistical tests of log-periodicity. We discuss the issue of prediction based on our
results and the evidence of outliers in the distribution of drawdowns. New
statistical tests demonstrate that the 1% to 10% quantile of the largest events of
the population of drawdowns of the Nasdaq composite index and of the Dow
Jones Industrial Average index belong to a distribution significantly different from
the rest of the population. This suggests that very large drawdowns result from
an amplification mechanism that may make them more predictable than smaller
market moves.
Zeti Akhtar Aziz(2005) "The use of benchmark market indices emerged on the
financial scene as early as in the 1880's. In 1884, Charles Dow, journalist and
founder of Dow Jones & Company produced the first Dow Jones Index,
published in the company's 'Customer Afternoon Letter' which was later to
become the Wall Street Journal. Of what we know, Charles Dow had always
been a keen market observer. The haphazard idiosyncratic price movements of
shares of individual or group of companies indeed did not lend itself to a coherent
assessment of the performance of the market nor enable any meaningful
analysis of market direction and investors' inclinations. This gave rise to the need
for an index that reflects the broad market performance and investors' interest.
This first market index was simple. Prices of 11 stocks, the most actively traded
on the New York Stock Exchange, were averaged. Charles Dow himself chose
these stocks, nine of them being railroad companies, the key growth industry at
the time. Over time, he would revise the index as he saw appropriate to be
reflective of ongoing market and industry developments.

Task Force established by the Committee on the Global Financial System of the
central banks of the Group of Ten countries(2001)
The Committee on the Global Financial System (CGFS) initiated a census of
stress test scenarios in early 2000. “Stress tests” are tools used by financial firms
to gauge their potential vulnerability to exceptional but plausible events. In recent
years stress testing has grown in importance, alongside value-at-risk (VaR) and
other risk measurement tools. The CGFS, which monitors the stability of global
financial markets for the G10 governors, sponsored this Task Force to learn
more about the role of
stress testing in risk management, to identify which exceptional events were
considered by market participants to be significant risks, and to develop
information on the heterogeneity of risk-taking at a point in time.Forty-three
banks (commercial and investment banks) from ten countries participated in the
census.The banks were asked to report their firm-wide stress tests that captured
 material risks, as of 31 May 2000. Also, the banks were asked seven questions
about how they perform and use stress
tests in risk management. Follow-up interviews were conducted with some of the
reporting banks to allow the banks to clarify and augment their responses.

Literature

The Nasdaq crash of April 2000: Yet another example of log-periodicity in a speculative
bubble ending in a crash
THE EUROPEAN PHYSICAL JOURNAL B - CONDENSED MATTER AND COMPLEX SYSTEMS
Volume 17, Number 2, 319-328, DOI: 10.1007/s100510070147
Abstract
The Nasdaq Composite fell another % on Friday the 14'th of April 2000 signaling the end of a remarkable
speculative high-tech bubble starting in spring 1997. The closing of the Nasdaq Composite at 3321
corresponds to a total loss of over 35% since its all-time high of 5133 on the 10'th of March 2000. Similarities
to the speculative bubble preceding the infamous crash of October 1929 are quite striking: the belief in what
was coined a “New Economy” both in 1929 and presently made share-prices of companies with three digits
price-earning ratios soar. Furthermore, we show that the largest draw downs of the Nasdaq are outliers with
a confidence level better than 99% and that these two speculative bubbles, as well as others, both nicely fit
into the quantitative framework proposed by the authors in a series of recent papers

The Dow Jones Industrial Average

The Impact of Fixing its Flaws
The Journal of Wealth ManagementWinter 2000, Vol. 3, No. 3: pp. 9-18 
DOI: 10.3905/jwm.2000.320332

John B . Shoven and Clemens Sialm

The Dow Jones Industrial Average is a flawed index. The index uses price weights instead of conceptually superior
market valuation weights. The companies included in the index are not chosen systematically and are not very
representative of the U.S. market; and the index ignores returns from dividends. This article shows that alternative
stock price indexes that use superior weighting methods and a more systematic inclusion criterion perform very
similarly to the Dow Jones Industrial Average, but, ignoring dividends dramatically underestimates the long-run
returns earned by stock market investors. If Dow Jones & Co. had included dividend returns in the DJIA when it was
formed in 1928, the index would be over 250,000 today.

Short Term Trading Strategy Based on Chart Pattern Recognition and Trend Trading in
Nasdaq Biotechnology Stock Market
Saulius Masteika
2010, Volume 57, Part 1, 51-56, DOI: 10.1007/978-3-642-15402-7_10

Abstract
The main task of this paper is to show the results of stock market trading strategy based on short term chart
pattern. Proposed short term chart pattern is a trend following pattern and is relative to fractal formations
and chaos theory. The proposed trading strategy consists of two steps: on the first step the stock screening
algorithm is used to select volatile stocks in Nasdaq Biotechnology market; on the second step
technical analysis and mathematical calculations for selected stocks are applied and profitability of strategy
is calculated. The proposed trading strategy based on short term chart pattern was tested using historical
data records from the USA Nasdaq Biotechnology market (2008-2010). The trading strategy applied in
Biotechnology stock market had given higher returns if compared to the main USA stock market indexes
(Dow Jones, S&P, Nasdaq).

Primer on U.S. stock price indices

Peter Fortune

New England Economic Review, 1998, issue Nov, pages 25-40

Abstract: The measurement of the "average" price of common stocks is a matter of widespread

interest. Investors want to know how "the market" is doing, and to be able to compare their
returns with a meaningful benchmark. Money managers often have their compensation tied to
performance, typically measured by comparing their results to a benchmark portfolio, so they
and their clients are interested in the benchmark portfolio's returns. And policymakers want to
judge the potential for sudden adjustments in stock prices when differences from "fundamental
value emerge. ; This article discusses some of the issues in constructing and interpreting stock
price indices. The author focuses on the most widely used indices: the Dow Jones Industrial
Average, the Standard & Poor's 500, the Russell 2000, the NASDAQ Composite, and the Wilshire
5000. Each of these indices is intended to be a benchmark portfolio for a different segment of
the universe of common stocks. He compares the movements in the five popular indices over the
last two decades and examines the correlations between the returns on each of the stock price
indices. His findings suggest that the Dow 30, the S&P 500, and the Wilshire 5000 are similar
and capture the movements in a different segment of the market than do the NASDAQComposite
and the Russell 2000.

FORECASTING STOCK INDEX VOLATILITY: COMPARING

IMPLIED VOLATILITY AND THE INTRADAY HIGH-LOW
PRICE RANGE

Charles Joseph Corrado and Cameron Truong

Journal of Financial Research, 2007, vol. 30, issue 2, pages 201-215

Abstract: The intraday high-low price range offers volatility forecasts similarly efficient to high-
quality implied volatility indexes published by the Chicago Board Options Exchange (CBOE) for
four stock market indexes: S&P 500, S&P 100,NASDAQ 100, and Dow Jones Industrials.
Examination of in-sample and out-of-sample volatility forecasts reveals that neither implied
volatility nor intraday high-low range volatility consistently outperforms the other. 2007 The
Southern Finance Association and the Southwestern Finance Association.

On the Sources of U.S. Stock Market Comovement

Enzo Weber

No 439, University of Regensburg Working Papers in Business, Economics and Management

Information Systemsfrom University of Regensburg, Department of Economics

Abstract: This paper disentangles direct spillovers and common factors as sources of

correlations in simultaneous heteroscedastic systems. While these different components are not
identifiable by standard means without restrictions, it is shown that they can be pinned down by
specifying the variances of the latent idiosyncratic and common shocks as ARCH-type processes.
Applying an adapted Kalman filter estimation method to Dow and Nasdaq stock returns,
predominant spillovers from the Dow and substantial rising factor exposure are found. While the
latter is shown to prevail in the recent global financial crisis, volatility in the dot-com bubble
period was driven by Nasdaq shocks.

What is Volatility?

In finance, volatility most frequently refers to the standard deviation of the continuously compounded returns of a financial
instrument within a specific time horizon. It is used to quantify the risk of the financial instrument over the specified time
period. Volatility is normally expressed in annualized terms, and it may either be an absolute number ($5) or a fraction of the
mean (5%).

Volatility as described here refers to the actual current volatility of a financial instrument for a specified period (for example

30 days or 90 days). It is the volatility of a financial instrument based on historical prices over the specified period with the

last observation the most recent price. This phrase is used particularly when it is wished to distinguish between the actual

current volatility of an instrument and

 actual historical volatility which refers to the volatility of a financial instrument over a specified period but with the

last observation on a date in the past

 actual future volatility which refers to the volatility of a financial instrument over a specified period starting at the

current time and ending at a future date (normally the expiry date of a option)

 historical implied volatility which refers to the implied volatility observed from historical prices of the financial

instrument (normally options)

 current implied volatility which refers to the implied volatility observed from current prices of the financial

instrument

 future implied volatility which refers to the implied volatility observed from future prices of the financial instrument

For a financial instrument whose price follows a Gaussian random walk, or Wiener process, the width of the distribution

increases as time increases. This is because there is an increasing probability that the instrument's price will be farther away

from the initial price as time increases. However, rather than increase linearly, the volatility increases with the square-root of
time as time increases, because some fluctuations are expected to cancel each other out, so the most likely deviation after

twice the time will not be twice the distance from zero.

Since observed price changes do not follow Gaussian distributions, others such as the Lévy distribution are often used.
[1]
 These can capture attributes such as "fat tails" although their variance remains finite.

Volatility for market players

When investing directly in a security, volatility is often viewed as a negative in that it represents uncertainty and risk.

However, with other investing strategies, volatility is often desirable. For example, if an investor is short on the peaks,

and long on the lows of a security, the profit will be greatest when volatility is highest.

In today's markets, it is also possible to trade volatility directly, through the use of derivative securities such

as options and variance swaps. See Volatility arbitrage.

Volatility versus direction

Volatility does not measure the direction of price changes, merely their dispersion. This is because when calculating

standard deviation (or variance), all differences are squared, so that negative and positive differences are combined into one

quantity. Two instruments with different volatilities may have the same expected return, but the instrument with higher

volatility will have a larger swings in values over a given period of time.

For example, a lower volatility stock may have an expected (average) return of 7%, with annual volatility of 5%. This would

indicate returns from approximately -3% to 17% most of the time (19 times out of 20, or 95%). A higher volatility stock, with

the same expected return of 7% but with annual volatility of 20%, would indicate returns from approximately -33% to 47%

most of the time (19 times out of 20, or 95%). These estimates assume a normal distribution; in reality stocks are found to

be leptokurtotic.

Volatility is a poor measure of risk, as explained by Peter Carr, "it is only a good measure of risk if you feel that being rich

then being poor is the same as being poor then rich".

Volatility over time

Although the Black Scholes equation assumes predictable constant volatility, none of these are observed in real markets,

and amongst the models are Bruno Dupire's Local Volatility, Poisson Process where volatility jumps to new levels with a

predictable frequency, and the increasingly popular Heston model of Stochastic Volatility.[2]

It's common knowledge that types of assets experience periods of high and low volatility. That is, during some periods prices

go up and down quickly, while during other times they might not seem to move at all.

Periods when prices fall quickly (a crash) are often followed by prices going down even more, or going up by an unusual

amount. Also, a time when prices rise quickly (a bubble) may often be followed by prices going up even more, or going down

by an unusual amount.
The converse behavior, 'doldrums' can last for a long time as well.

Most typically, extreme movements do not appear 'out of nowhere'; they're presaged by larger movements than usual. This

is termedautoregressive conditional heteroskedasticity. Of course, whether such large movements have the same direction,

or the opposite, is more difficult to say. And an increase in volatility does not always presage a further increase—the

volatility may simply go back down again.

[edit]Mathematical definition

The annualized volatility σ is the standard deviation of the instrument's yearly logarithmic returns.

The generalized volatility σT for time horizon T in years is expressed as:

Therefore, if the daily logarithmic returns of a stock have a standard deviation of σSD and the time period of returns

is P, the annualized volatility is

A common assumption is that P = 1/252 (there are 252 trading days in any given year). Then, if σSD = 0.01 the

annualized volatility is

The monthly volatility (i.e., T = 1/12 of a year) would be

The formula used above to convert returns or volatility measures from one time period to another

assume a particular underlying model or process. These formulas are accurate extrapolations of

a random walk, or Wiener process, whose steps have finite variance. However, more generally, for

natural stochastic processes, the precise relationship between volatility measures for different time

periods is more complicated. Some use the Lévy stability exponent α to extrapolate natural

processes:

If α = 2 you get the Wiener process scaling relation, but some people believe α < 2 for

financial activities such as stocks, indexes and so on. This was discovered by Benoît

Mandelbrot, who looked at cotton prices and found that they followed a Lévy alpha-stable
 distribution with α = 1.7. (See New Scientist, 19 April 1997.) Mandelbrot's conclusion is,

however, not accepted by mainstream financial econometricians.

Crude Volatility Estimation

Using a simplification of the formulas above it is possible to estimate annualized volatility based solely on approximate

observations. Suppose you notice that a market price index, which has a current value near 10,000, has moved about 100

points a day, on average, for many days. This would constitute a 1% daily movement, up or down.

To annualize this, you can use the "rule of 16", that is, multiply by 16 to get 16% as the annual volatility. The rationale for this

is that 16 is the square root of 256, which is approximately the number of trading days in a year (252). This also uses the

fact that the standard deviation of the sum of n independent variables (with equal standard deviations) is √n times the

standard deviation of the individual variables.

Of course, the average magnitude of the observations is merely an approximation of the standard deviation of the market

index. Assuming that the market index daily changes are normally distributed with mean zero and standard deviation σ, the

expected value of the magnitude of the observations is √(2/π)σ = 0.798σ. The net effect is that this crude approach

overestimates the true volatility by about 25%.

[edit]Estimate of Compound Annual Growth Rate (CAGR)

Consider the Taylor series:

Taking only the first two terms one has:

Realistically, most financial assets have negative skewness and leptokurtosis, so this formula tends to be over-

optimistic. Some people use the formula:

for a rough estimate, where k is an empirical factor (typically five to ten).