Question

Discuss the pros and cons of creating shareholder value. Discuss the pros and cons of Market Capitalization, Discuss the pros and cons of market indexes market indexes such as the(Research each term via the Internet and determine which stock exchange they follow) S&P 500, The DJIA, DAX, CAC-40, NASD 1000, and the FTSE-100.  Finally, research and discuss the major differences between the New York Stock Exchange (NYSE) and NASDAQ.

Answer 1

A. Pros and cons of creating shareholder value -

Pros -

1. The most strategic decisions are based on shareholder value which gives a overall financial view.

2. It is widely across the globe as it is not limited to a particular accounting policy and has a universal approach which is applicable in all sectors.

3. It forces the company to focus on its customers (shareholders) and the future of the company.

Cons -

1. Estimating future cash flows is extremely difficult leading to difficulty in taking strategic decisions.

2. Calculating the shareholder value is a long and complex process as well as requires complete information.

B. Pros and cons of Market Capitalization -

Pros -

1. It helps in determining the size of the company which means the market value of the company.

2. It helps the investor to take investment decision.

Cons -

1. For an investor to take decision on the basis of market capitalization instead of Enterprise value will be risky.

C. Pros and cons of market indexes -

Pros -

1. It is the most easy way to track the overall performance of the company.

2. The present stage of the economy can be checked with the statistical measurement.

3. The complete track of the performance of a particular company can be seen at a glance via its history records which helps investors to take investing decisions.

Cons -

1. There are different methods of calculation of different indices which is one of its disadvantage.

2. Higher priced stocks have more influence on movements of prices in the index as compared to lower-priced stocks.

D. Pros and cons of S&P 500, The DJIA, DAX, CAC-40, NASD 1000, and the FTSE-100.

Market Indices	Pros	Cons
S&P 500	1. It focuses on the market capitalization of large companies which are listed in NYSE or in NASDAQ 2.The index components are updated quarterly. 3. It is the most reliable bench marking tool for peer comparison between companies. 4. Investors can invest minimum one share which opens an opportunity for low income investors to invest.	1. Difficulty in measuring accurate return on portfolio for an individual investor who is investing in small cap companies. 2. It measures the performance of companies for a long term duration making it difficult to measure for companies of short term period. 3. Expensive in terms of different fees which can affect the value of portfolio of companies. 4. It is mandatory for a company to be in operative state for 6 months after Initial Public Offering (IPO)
The DJIA	1. This index consists of 30 blue chip companies in the United States. 2. This index is not volatile and risky. 3.The index covers companies from all industries except transportation and utilities.	1. The index has limited number (30) of companies, so not considered suitable for benchmark for performance of the entire market. 2. It has price-weighted system, which means more expensive stocks have influence over the less expensive ones. 3. Selection of the companies is done by the averages committee.
DAX	1. It considers the value of 30 biggest and most liquid companies trading on Frankfurt Stock Exchange (FSE) of Germany. 2. The index is updated on regular basis.	1. It cannot be purchased or sold like stock. It has to be traded using derivatives. 2. The company has to be listed publicly for at least 3 years before getting featured on DAX. On the basis of their market cap and order book size they are added or removed from listing on this index. 3. It uses capitalization-weighted index, where companies having higher market cap will have a bigger influence on its price.
CAC-40	1. It is the index which consists of stocks of 40 companies listed on the forward segment of Paris. 2. It is the most heavily traded options in the world.	1. It has a capitalization-weighted measuring system quarterly of each company.
NASD 1000	Kindly provide more information ***** (Refer note below)	Kindly provide more information***** (Refer note below)
FTSE-100	1. It has share index of 100 companies listed on London Stock Exchange with the highest market capitalization. 2. Strong long term return to investors. 3. It has high dividend yield as compared to other indices.	1. The index uses free float mechanism for pricing its shares where companies with high market cap have influence on smaller companies. 2. It is less diversified being exposed largely to financial and oil sectors than technology sectors.

D. Major differences between the New York Stock Exchange (NYSE) and NASDAQ -

No.	Differences	New York Stock Exchange (NYSE)	NASDAQ
1.	Foundation year	1792	1971
2.	Type of market	Auction market - Direct selling between Buyers and Sellers.	Dealer's market - Selling between Buyers and Sellers is done through dealers.
3.	Entry Fee	up to $500,000	$50,000 to $75,000
4.	Fee for Listing	It is based on the number of shares of a particular security which is listed on NYSE. It is capped at $500,000.	The yearly fee is generally around $27,500
5.	Volatility	The companies listed on NYSE are less volatile consisting mainly of blue chip companies.	The companies listed on NASDAQ are more volatile and are focused on growth consisting mainly of Information Technology (IT) and Electronics companies.
6.	Indices	NYSE 100 and NYSE Composite	NASDAQ 100, NASDAQ Composite and NASDAQ Biotechnology
7.	Market Makers	Designated Market Maker (DMM) steps in to buy and sell as many shares as required to maintain fair operations for a particular security.	Each security has usually has one or more market maker and the average goes up to 14 market makers for each stock which helps in liquidity and trading efficiently.

*****Note - Regarding pros and cons of NASD 1000 so that accurate information can be provided.