Good-til-Cancelled (GTC) order and Immediate-or-Cancel (IOC) order

February 16, 2025April 14, 2023 by Lokendra RATHORE

Good-til-Cancelled (GTC) order and Immediate-or-Cancel (IOC) order

In this article, Lokendra RATHORE (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2022-2023) explains the Good-til-Cancelled (GTC) order and the Immediate-or-Cancel (IOC) used to trade in financial markets.

In addition to the types of orders that we discussed in Period1 of the SimTrade certificate (market orders, limit orders, best limit orders, stop loss orders and stop limit orders), I would like to elaborate on the following two other types or order that I have used in the past and found useful: Good-til-Cancelled (GTC) Order and Immediate-or-Cancel (IOC) Order.

What is Good-til-Cancelled (GTC) Order?

A Good-till-Cancelled (GTC) order is an order that remains in effect until it is either executed or cancelled by the investor. This type of order allows the investor to place a standing order that remains active until the investor cancels it or it is filled. For example, if an investor wants to purchase a stock when it reaches a certain price, they can place a GTC order, and the order will remain active until either the price is reached or the investor cancels it.

Significance

Flexibility: GTC orders provide investors with a high level of flexibility, as they remain active for an indefinite period of time. This allows investors to take advantage of market opportunities without having to send order every day.

Long-term Investment Strategy: GTC orders are particularly useful for investors who have a long-term investment strategy and are looking to accumulate shares over a period of time. The investor can place a GTC order at a specific price, and the order will remain active until the desired price is reached.

What is Immediate-or-Cancel (IOC) Order?

An Immediate-or-Cancel (IOC) order is a type of order that must be executed immediately, and any portion of the order that cannot be filled is cancelled. This type of order is used when an investor wants to ensure that an order is executed as quickly as possible, even if only part of the order can be filled. For example, if an investor wants to purchase a large number of shares of a stock, they may place an IOC order. If only a portion of the shares can be purchased immediately, the remainder of the order will be cancelled.

Significance

Time-sensitive: IOC orders are suitable for investors who need to execute a trade quickly, such as when they need to close a position or take advantage of a sudden market opportunity.

Partial Fills: The IOC order allows for partial fills, meaning that if only a portion of the order can be executed immediately, the remainder of the order is cancelled. This can be useful when an investor wants to limit their exposure to a particular stock.

What is the difference between Good-til-Cancelled (GTC) Order and Day order

Table 1. Comparison of GTC and IOC orders.

Source: production by the author.

In conclusion, both GTC and IOC orders are useful tools for investors who want to manage their trades and execute their investment strategies effectively. The choice of which type of order to use will depend on the specific needs and investment objectives of the investor.

Useful resources

SimTrade course Trade orders

U.S. Securities and Exchange Commission (SEC) investor.gov

Investor.gov (SEC) Good-til-cancelled order

Investor.gov (SEC) Understanding Order Types

About the author

The article was written in April 2023 by Lokendra RATHORE (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2022-2023).

Insuring Success in France: My Journey with InsurdHR

April 14, 2023 by Lokendra RATHORE

Insuring Success in France: My Journey with InsurdHR

In this article, Lokendra RATHORE (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2022-2023) shares his working experience at InsurdHR.

InsurdHR – Company Overview

InsurdHR is a Singapore-based insurance broker platform providing Software as a Service (SaaS) that offers insurance solutions to startups and Small and Medium Enterprises (SMEs). The company is looking to expand its offerings to the French market to help its clients access insurance services more easily.

Logo of InsurdHR
Logo of InsurdHR
Source: InsurdHR.

My internship

I had the opportunity to work with InsurdHR which had partnered with SemioConsult (a privately owned consulting firm) for this expansion mission. As a student at ESSEC Business School on the Cergy campus (France), this project provided me with the unique opportunity to apply my academic knowledge to a real-world problem (market entry).

As a Strategy Consultant, I was responsible for conducting market research and analysis to help InsurdHR enter the French insurance brokerage market. During my time at InsurdHR, I had the opportunity to work on a number of exciting projects that allowed me to further develop my skills and knowledge.

My missions

One of my main missions was to conduct market research with due diligence for competitive analysis, market sizing, risk assessment, and identification of key partners. I used various sources, including Statista, Marketline, and Factiva, to gather data and insights on the French insurance market. Through my research, I was able to gain a comprehensive understanding of the industry and the key players within it.

Another key aspect of my internship was the analysis of other several survey reports on customer attitudes towards insurance in France. This allowed me to effectively segment, target, and position InsurdHR’s offering in the market. My findings helped the company to develop a more targeted and effective marketing strategy, which ultimately will lead to increased customer acquisition.

Working closely with the CEO of InsurdHR, I also had the opportunity to devise a preliminary market penetration strategy for the soft launch of the company’s services in France. This involved creating a roadmap for customer acquisition, with the goal of reaching the target population in the French market. Through this project, I was able to apply my knowledge of market research and analysis to develop a practical and effective strategy for the company.

Throughout my internship, I had the opportunity to work with a variety of people from different backgrounds and gain exposure to the fast-paced and dynamic world of insurance as a service. I learned how to conduct market research, analyze data, and collaborate effectively with others to achieve common goals.

Overall, my internship experience at InsurdHR was a truly rewarding and educational experience. I am grateful for the opportunities I had to learn and grow, and I am confident that the skills and knowledge I gained will be valuable to me in my future endeavors.

The skills required for this internship included strong research and analysis skills, effective communication and collaboration, and an understanding of the French insurance industry. Through this internship, I gained hands-on experience in these areas and was able to make a meaningful contribution to InsurdHR’s expansion efforts in France.

Key Concepts that I learned

I present below a few concepts related to my work: market sizing, risk assessment, and customer acquisition.

Market Sizing

Market Sizing is about determining the size of the target market which is an important first step in creating a successful business strategy. This involves analyzing data on market trends and customer behavior to determine the potential size of the market and the company’s ability to capture a portion of it.

Risk Assessment

In the insurance industry, risk assessment is a critical component of determining the cost and feasibility of offering a new product or service. This involves evaluating the potential risks and uncertainties associated with the market and making informed decisions based on this information.

Customer Acquisition

Customer acquisition is the process of acquiring new customers and converting them into paying customers. This involves developing and executing a strategy to reach, attract, and engage potential customers, as well as measuring the effectiveness of the acquisition efforts over time.

Why should I be interested in this post?

If you are interested in gaining insights into the practical application of academic knowledge in real-world business scenarios, particularly in the insurance industry, this post is definitely worth reading. The author shares his firsthand experience of working as a strategy consultant with InsurdHR, a company that was expanding into the French insurance brokerage market. The post covers various aspects of the author’s internship, including conducting market research, competitive analysis, risk assessment, and customer acquisition strategies.

Additionally, the author provides valuable insights into key concepts such as market sizing, risk assessment, and customer acquisition, which are relevant not only to the insurance industry but to any business looking to enter a new market or expand their customer base. Overall, this post is informative and provides a practical perspective on applying academic knowledge to real-world business problems.

Useful resources

InsurdHR

SemioConsult

About the author

The article was written in April 2023 by Lokendra RATHORE (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2022-2023).

The NASDAQ index

April 10, 2023 by Nithisha CHALLA

The NASDAQ index

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023) presents the NASDAQ index and details its characteristics.

The NASDAQ index

NASDAQ was first founded in 1971 and it is an American stock exchange. By market capitalization of shares traded it is the second-largest stock exchange in the world after the New York Stock Exchange (NYSE). As many of the technology and growth companies are listed on the exchange it is a popular benchmark for them. It has around 3000 companies listed on it, including some of the world’s top technology companies like Microsoft, Amazon, Facebook and Google.

The NASDAQ index is a market capitalization-weighted index that tracks the performance of the stocks listed on the NASDAQ exchange. It is widely used by investors and financial analysts to gauge the performance of the technology sector and the broader US economy.

Interestingly, there is a sister index, the Nasdaq Financial 100 that consists only of financial stocks. Both indices debuted together in 1985. The Nasdaq Financial 100 index was given more attention in the early years. However, the Nasdaq-100 has gained popularity over time due to the expansion of tech companies.

How is the NASDAQ index represented in trading platforms and financial websites? The ticker symbol used in the financial industry for the NASDAQ index is “NDAQ”.

Table 1 gives the Top 10 stocks in the NASDAQ index in terms of market capitalization as of August 26, 2022.

Table 1. Top 10 stocks in the NASDAQ index.

Source: computation by the author (data: NASDAQ! financial website).

Table 2 gives the sector representation of the NASDAQ index in terms of number of stocks and market capitalization as of January 31, 2023.

Table 2. Sector representation in the NASDAQ index.

Source: computation by the author (data: ETmoney!).

Calculation of the NASDAQ index value

The NASDAQ index is a value-weighted index (also called a market-capitalization- weighted index). This means the larger companies have a greater impact on the index than the smaller companies.

At the end of each trading day the value of the NASDAQ index is determined in real-time and can be used as a benchmark for the performance of the index’s constituent companies’ current market prices.

The formula for a market-capitalization-weighted index is given by

Market Capitalization Index value

Where I is the index value, k a given asset, K the number of assets in the index, P^k the market price of asset k, N^k the number of issued shares for asset k, and t the time of calculation of the index.

In a market capitalization-weighted index, the weight of asset k is given by formula can be rewritten as

Market Capitalization Weighted Index Weight

which clearly shows that the weight of each asset in the index is its market capitalization of the asset divided by the sum of the market capitalizations of all assets.

Note that the divisor, whose calculation is based on the number of shares, is typically adjusted for events such as stock splits and dividends. The divisor is used to ensure that the value of the index remains consistent over time despite changes in the number of outstanding shares.

Use of the NASDAQ index in asset management

Given that the index is used for performance measuring it is widely used for constructing and analyzing investment portfolios. This index’s primary use is to create investment strategies, mitigate risk, and assess portfolio performance. Investors and asset managers utilize this index as a useful index to measure the overall performance of the market. It is mainly used for benchmarking, passive investing, active management and risk management.

Benchmark for equity funds

There are several indices that are used as a benchmark for equity funds, but the NASDAQ index is notable for its emphasis on businesses that invest in the technology sector, growth stocks, or both. It is primarily used to compare their performance to the overall market or a particular industry. Additionally, it gives investors a way to contrast the performance of various equity funds with various investment strategies or objectives.

While there are many advantages to using indexes as benchmarks, there are also some disadvantages and restrictions. For instance, benchmarks may not always be indicative of the precise investment goals or risk profile of a fund. Furthermore, benchmarks may be distorted by elements like the size or makeup of the companies included in the index.

Financial products around the NASDAQ index

Investors of all levels can invest in the Nasdaq-100 in a variety of ways, including through ETFs, mutual funds, options, futures, and annuities. ETFs that track the Nasdaq-100 are the easiest way to invest in the index. The ETF gives you exposure to all the 100 largest non-financial companies through a single investment. One of the most well-known ETFs that tracks the Nasdaq-100 index is the Invesco QQQ ETF and the First Trust NASDAQ-100 Technology Sector ETF (QTEC). The Nasdaq-100 is regarded as the best way to invest in some of the top non-financial companies listed on the Nasdaq because of its track record of strong index performance.

The Nasdaq-100 includes foreign stocks as well, unlike the S&P 500. Again, unlike the S&P 500, the Nasdaq-100 only permits non-financial companies to list on it. As of April 2023, a few of the international stocks that are a part of the Nasdaq-100 are Baidu from China, Ryanair from Ireland, Garmin from Cayman Island, and Infosys from India.

Index funds that attempt to track the Nasdaq Composite include Fidelity Investments’ FNCMX mutual fund and ONEQ exchange-traded fund. For investors looking for broad exposure to the stock market with relatively low fees, index funds are a popular option.

Historical data for the NASDAQ index

How to get the data?

The NASDAQ index is the most common index used in finance, and historical data for the NASDAQ index can be easily downloaded from the internet.

For example, you can download data for the NASDAQ index from January 5, 1972 on Yahoo! Finance (the Yahoo! code for NASDAQ index is ^IXIC).

Source: Yahoo! Finance.

You can also download the same data from a Bloomberg terminal.

R program

The R program below written by Shengyu ZHENG allows you to download the data from Yahoo! Finance website and to compute summary statistics and risk measures about the Nasdaq index.

Data file

The R program that you can download above allows you to download the data for the Nasdaq index from the Yahoo! Finance website. The database starts on January 2, 1992. It also computes the returns (logarithmic returns) from closing prices.

Table 3 below represents the top of the data file for the Nasdaq index downloaded from the Yahoo! Finance website with the R program.

Table 3. Top of the data file for the Nasdaq index.
Top of the file for the Nasdaq index data
Source: computation by the author (data: Yahoo! Finance website).

Summary statistics for the Nasdaq index

The R program that you can download above also allows you to compute summary statistics about the returns of the Nasdaq index.

Table 4 below presents the following summary statistics estimated for the Nasdaq index:

The mean
The standard deviation (the squared root of the variance)
The skewness
The kurtosis.

The mean, the standard deviation / variance, the skewness, and the kurtosis refer to the first, second, third and fourth moments of statistical distribution of returns respectively.

Table 4. Summary statistics for the Nasdaq index.

Source: computation by the author (data: Yahoo! Finance website).

Evolution of the Nasdaq index

Figure 1 below gives the evolution of the Nasdaq index from January 2, 1992 to December 30, 2022 on a daily basis.

Figure 1. Evolution of the Nasdaq index.

Source: computation by the author (data: Yahoo! Finance website).

Figure 2 below gives the evolution of the Nasdaq index returns from January 2, 1992 to December 30, 2022 on a daily basis.

Figure 2. Evolution of the Nasdaq index returns.

Source: computation by the author (data: Yahoo! Finance website).

Statistical distribution of the Nasdaq index returns

Historical distribution

Figure 3 represents the historical distribution of the Nasdaq index daily returns for the period from January 2, 1992 to December 30, 2022.

Figure 3. Historical distribution of the Nasdaq index returns.

Source: computation by the author (data: Yahoo! Finance website).

Gaussian distribution

The Gaussian distribution (also called the normal distribution) is a parametric distribution with two parameters: the mean and the standard deviation of returns. We estimated these two parameters over the period from January 2, 1992 to December 30, 2022. The mean of daily returns is equal to 0.02% and the standard deviation of daily returns is equal to 1.20% (or equivalently 5.88% for the annual mean and 19.38% for the annual standard deviation as shown in Table 3 above).

Figure 4 below represents the Gaussian distribution of the Nasdaq index daily returns with parameters estimated over the period from January 2, 1992 to December 30, 2022.

Figure 4. Gaussian distribution of the Nasdaq index returns.
Gaussian distribution of the daily Nasdaq index returns
Source: computation by the author (data: Yahoo! Finance website).

Risk measures of the Nasdaq index returns

The R program that you can download above also allows you to compute risk measures based the returns of the Nasdaq index.

Table 5 below presents the following risk measures estimated for the Nasdaq index:

The long-term volatility (the unconditional standard deviation estimated over the entire period)
The short-term volatility (the standard deviation estimated over the last three months)
The Value at Risk (VaR) for the left tail (the 5% quantile of the historical distribution)
The Value at Risk (VaR) for the right tail (the 95% quantile of the historical distribution)
The Expected Shortfall (ES) for the left tail (the average loss over the 5% quantile of the historical distribution)
The Expected Shortfall (ES) for the right tail (the average loss over the 95% quantile of the historical distribution)
The Stress Value (SV) for the left tail (the 1% quantile of the tail distribution estimated with a Generalized Pareto distribution)
The Stress Value (SV) for the right tail (the 99% quantile of the tail distribution estimated with a Generalized Pareto distribution)

Table 5. Risk measures for the Nasdaq index.

Source: computation by the author (data: Yahoo! Finance website).

The volatility is a global measure of risk as it considers all the returns. The Value at Risk (VaR), Expected Shortfall (ES) and Stress Value (SV) are local measures of risk as they focus on the tails of the distribution. The study of the left tail is relevant for an investor holding a long position in the Nasdaq index while the study of the right tail is relevant for an investor holding a short position in the Nasdaq index.

Why should I be interested in this post?

For a number of reasons, ESSEC students should learn about the Nasdaq index. The performance of tech-oriented companies is tracked by this stock market index, which is first and foremost well-known and respected. Gaining a deeper understanding of the US stock market and the businesses that fuel its expansion requires knowledge of the Nasdaq index. Management students can assess the performance of their own investments and those of their organization by comprehending the Nasdaq index and its components. Last but not least, a lot of businesses base their mutual funds and exchange-traded funds (ETFs) on the Nasdaq index.

Useful resources

Academic research about risk

Longin F. (2000) From VaR to stress testing: the extreme value approach Journal of Banking and Finance, N°24, pp 1097-1130.

Longin F. (2016) Extreme events in finance: a handbook of extreme value theory and its applications Wiley Editions.

Data: Yahoo! Finance

Yahoo! Finance

Yahoo! Finance Data for the Nasdaq index

Data: Bloomberg

Bloomberg

Bloomberg Data for the Nasdaq index

About the author

The article was written in April 2023 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023).

The DJIA index

April 10, 2023 by Nithisha CHALLA

The DJIA index

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023) presents the Dow Jones Industrial Average (DJIA) index and details its characteristics.

The DJIA index

The Dow Jones Industrial Average (DJIA) index was created on May 26, 1896, by Charles Dow and Edward Jones, the co-founders of Dow Jones & Company. It is publicly known as the Dow Jones index or the Dow in general. The DJIA is currently owned and managed by The Wall Street Journal.

It is a stock market index in the United States which represents the performance of 30 large-capitalization publicly traded companies. Today, it is no longer limited to just industrial companies like how it was initially and includes stocks from a variety of sectors, such as technology, healthcare, and finance.

Who decides about the selection of stocks in the index? The Wall Street Journal, which owns the index, selects the stocks based on a variety of factors, such as the company’s size and reputation, and the representation of the industries.

The DJIA is a price-weighted index, which means that each stock’s weight in the index is determined by its price per share rather than its market capitalization such as the S&P 500 index (see below for the technical details). The DJIA is published and disseminated in real-time by various financial news outlets and can be accessed by investors and traders around the world.

How is the DJIA index represented in trading platforms and financial websites? The ticker symbol used in the financial industry for the DJIA index is “DJI”.

Table 1 gives the Top 10 stocks in the DJIA index in terms of market capitalization as of January 19, 2023.

Table 1. Top 10 stocks in the DJIA index.

Source: computation by the author (data: Motley Fool financial website).

Table 2 gives the sector representation of the DJIA index in terms of number of stocks and market capitalization as of January 31, 2023.

Table 2. Sector representation in the DJIA index.

Source: computation by the author (data: Wikipedia).

Calculation of the DJIA index value

As a price-weighted index, the DJIA has a greater impact on the index value when the stock prices of companies are higher. The DJIA index value is determined solely based on stock prices, disregarding any dividends that the companies that make up the index have paid.

The formula for a price-weighted index is given by

Price Weighted Index value

where I is the index value, k a given asset, K the number of assets in the index, P^k the market price of asset k, and t the time of calculation of the index.

In a price-weighted index, the weight of asset k is given by the following formula

Price Weighted Index Weight

which clearly shows that the weight of each asset in the index is its market price divided by the sum of the market prices of all assets.

Note that the divisor, which is equal to the number of shares, is typically adjusted for events such as stock splits and dividends. The divisor is used to ensure that the value of the index remains consistent over time despite changes in the number of outstanding shares. A more general formula may then be:

Index value

Where D is the divisor which is adjusted over time to account for events such as stock splits and dividends.

Use the DJIA index in asset management

As we all know, investors frequently use the DJIA index as a benchmark. The DJIA index is used by asset managers to compare the returns on their investments to market returns. Given that it is an index that gauges market performance, it supports investors in carrying out key asset management tasks like passive investments, the capacity to assess corporate risk, asset allocation, portfolio management, etc. But we should always be aware that the DJIA does not encompass all markets and industries in the US. As a result, whenever we evaluate the performance of the US market, we should always take other indexes such as the S&P 500 index and the Russell 2000 into account.

Benchmark for equity funds

Now how do we decide if DJIA is a benchmark for equity funds in the US market? Precisely by seeing if the index indicates all the sectors and industries in the market. Since the DJIA is a price-weighted index and only takes the top 30 companies into account, it is not typically used as a benchmark for the entire US market. We should also take into account other diverse indexes, such as the S&P 500 or the Russell 2000, which offer a more complete representation of the market, if we need a benchmark for the entire US market.

Financial products around the DJIA index

There are a number of financial products centered around the DJIA index that can offer investors some insight, as we are aware that it measures the performance of sizable publicly traded companies listed on the New York Stock Exchange (NYSE) and the Nasdaq. I listed the main financial products associated with the DJIA index through which investors can access the index as below:

Exchange-Traded Funds, Options Contracts, Futures Contracts, Index funds and Mutual funds.
ETFs are the investment funds that are traded like stocks. The SPDR Dow Jones Industrial Average ETF (DIA) and the ProShares Ultra Dow30 ETF are two examples of ETFs that track the DJIA index (DDM)
Futures and Options Contracts allow investors to buy or sell the DJIA index at a specific price and date in the future. Primarily to combat market volatility, to generate income through trading strategies, or to make predictions about the index’s future course
Mutual funds and index funds tend to focus more on investing in firms that are included in the DJIA index or attempt to replicate the performance of the index by purchasing the same stocks that make up the index

Historical data for the DJIA index

How to get the data?

The DJIA index is the most common index used in finance, and historical data for the DJIA index can be easily downloaded from the internet.

For example, you can download data for the DJIA index from January 2, 1992 on Yahoo! Finance (the Yahoo! code for DJIA index is ^DJI).

Source: Yahoo! Finance.

You can also download the same data from a Bloomberg terminal.

R program

The R program below written by Shengyu ZHENG allows you to download the data from Yahoo! Finance website and to compute summary statistics and risk measures about the DJIA index.

Data file

The R program that you can download above allows you to download the data for the DJIA index from the Yahoo! Finance website. The database starts on January 2, 1992. It also computes the returns (logarithmic returns) from closing prices.

Table 3 below represents the top of the data file for the DJIA index downloaded from the Yahoo! Finance website with the R program.

Table 3. Top of the data file for the DJIA index.
Top of the file for the DJIA index data
Source: computation by the author (data: Yahoo! Finance website).

Summary statistics for the Dow Jones index

The R program that you can download above also allows you to compute summary statistics about the returns of the Dow Jones index.

Table 4 below presents the following summary statistics estimated for the Dow Jones index:

The mean
The standard deviation (the squared root of the variance)
The skewness
The kurtosis.

The mean, the standard deviation / variance, the skewness, and the kurtosis refer to the first, second, third and fourth moments of statistical distribution of returns respectively.

Table 4. Summary statistics for the Dow Jones index.

Source: computation by the author (data: Yahoo! Finance website).

Evolution of the Dow Jones index

Figure 1 below gives the evolution of the Dow Jones index from January 2, 1992 to December 30, 2022 on a daily basis.

Figure 1. Evolution of the Dow Jones index.

Source: computation by the author (data: Yahoo! Finance website).

Figure 2 below gives the evolution of the Dow Jones index returns from January 2, 1992 to December 30, 2022 on a daily basis.

Figure 2. Evolution of the Dow Jones index returns.

Source: computation by the author (data: Yahoo! Finance website).

Statistical distribution of the Dow Jones index returns

Historical distribution

Figure 3 represents the historical distribution of the Dow Jones index daily returns for the period from January 2, 1992 to December 30, 2022.

Figure 3. Historical distribution of the Dow Jones index returns.

Source: computation by the author (data: Yahoo! Finance website).

Gaussian distribution

Figure 4 below represents the Gaussian distribution of the DJIA index daily returns with parameters estimated over the period from January 2, 1992 to December 30, 2022.

Figure 4. Gaussian distribution of the Dow Jones index returns.

Source: computation by the author (data: Yahoo! Finance website).

Risk measures of the Dow Jones index returns

The R program that you can download above also allows you to compute risk measures about the returns of the Dow Jones index.

Table 5 below presents the following risk measures estimated for the Dow Jones index:

The long-term volatility (the unconditional standard deviation estimated over the entire period)
The short-term volatility (the standard deviation estimated over the last three months)
The Value at Risk (VaR) for the left tail (the 5% quantile of the historical distribution)
The Value at Risk (VaR) for the right tail (the 95% quantile of the historical distribution)
The Expected Shortfall (ES) for the left tail (the average loss over the 5% quantile of the historical distribution)
The Expected Shortfall (ES) for the right tail (the average loss over the 95% quantile of the historical distribution)
The Stress Value (SV) for the left tail (the 1% quantile of the tail distribution estimated with a Generalized Pareto distribution)
The Stress Value (SV) for the right tail (the 99% quantile of the tail distribution estimated with a Generalized Pareto distribution)

Table 5. Risk measures for the Dow Jones index.

Source: computation by the author (data: Yahoo! Finance website).

The volatility is a global measure of risk as it considers all the returns. The Value at Risk (VaR), Expected Shortfall (ES) and Stress Value (SV) are local measures of risk as they focus on the tails of the distribution. The study of the left tail is relevant for an investor holding a long position in the S&P 500 index while the study of the right tail is relevant for an investor holding a short position in the S&P 500 index.

Why should I be interested in this post?

For a number of reasons, ESSEC students should learn about the Dow Jones index. The performance of 30 large-cap American companies is tracked by this stock market index, which is first and foremost well-known and respected. Gaining a deeper understanding of the US stock market and the businesses that fuel its expansion requires knowledge of the Dow Jones index. Management students can assess the performance of their own investments and those of their organization by comprehending the Dow Jones index and its components. Last but not least, a lot of businesses base their mutual funds and exchange-traded funds (ETFs) on the Dow Jones index.

Useful resources

Academic research about risk

Longin F. (2000) From VaR to stress testing: the extreme value approach Journal of Banking and Finance, N°24, pp 1097-1130.

Longin F. (2016) Extreme events in finance: a handbook of extreme value theory and its applications Wiley Editions.

Data: Yahoo! Finance

Yahoo! Finance

Yahoo! Finance Data for the DJIA index

Data: Bloomberg

Bloomberg

Bloomberg Data for the DJIA index

About the author

The article was written in April 2023 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023).

Float

April 10, 2023 by Nithisha CHALLA

Float

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023) explains float and its use in the construction financial indexes.

What is Float?

The term “float” (sometimes mentioned as “free float”) refers to the quantity of shares that are readily tradable in financial markets. The float is defined as

Float = Total outstanding shares – Closely held shares – Restricted shares

Outstanding shares are the total number of shares issued by the company.

Closely held shares are the shares of a company that are owned by a small number of shareholders and are not traded on a public stock exchange. These shareholders may include company founders, family members, or a small group of private investors.

Restricted shares are the shares that are not transferable until certain conditions are met and are typically held by corporate management, such as executives and directors. Restricted shares are a type of equity compensation that some employees receive.

The float is usually expressed as a percentage of the total number of shares issued by the company.

Float and IPO

When a company conducts an initial public offering (IPO) or a seasoned offering (SEO) to finance its operational activities and investments, it releases a certain number of shares onto the market that are available for purchase by anyone interested in acquiring a piece of the company. The number of shares issued by the company increases the float. Before the IPO, the float is equal to zero. After the IPO, the float increases but may be relatively small as the founder or top managers of the company may want or have to keep some of their shares.

Why is the float important?

The float is crucial for the calculation of market capitalization-weighted stock market indices. The weight of a company’s stock in the index and, consequently, its impact on the performance of the index as a whole, can change depending on whether shares are included in or excluded from the float. Because of this, a lot of indices base their values solely on the shares in the float, known as the float-adjusted market capitalization method.

Stock market liquidity increases as the float increases. As the number of shares that can be purchased and sold increases, it makes it simpler for an investor to enter and exit the market.

High-float stocks and low-float stocks

In the equity market, we often distinguish high-float stocks and low-float stocks according to the percentage of shares that are available for trading in the market. High-float stocks have more supply and more shares available for trading than low-float stocks.

High float stocks have greater liquidity and are less volatile. In a situation where there is extremely heavy demand, supply and demand will become imbalanced, which will lead to extreme price moves.

Example

The percentage of float shares in relation to all outstanding shares is known as the float percentage. Let us consider the case of Amazon. As of September 2021, Amazon had approximately 505 million shares outstanding. Of these shares, approximately 425 million were considered “float shares”. Float shares are the shares available for trading by the public and exclude shares held by insiders, institutional investors, and other long-term investors.

Therefore, Amazon’s float share percentage would be calculated as follows:
(425 million float shares / 505 million outstanding shares) x 100% = 84.16%

This indicates that the public had access to about 84.16% of Amazon’s outstanding shares for trading. Insiders, institutions, and other long-term investors held the remaining 15.84% of the stock.

Indexes using the float

Equity indices that track the performance of a particular group of companies, such as small-cap or mid-cap companies, are frequently created using float-based indexes. The market capitalization of each company, which is determined by multiplying the total number of outstanding shares by the current share market price, is considered in the calculation of these indices.

The Russell 2000 index, which tracks the performance of 2,000 small-cap companies in the US, and the MSCI World Small Cap index, which tracks the performance of small-cap companies in developed markets worldwide, are two of the many examples of indexes that make use of the float.

We present below the formula for a market-capitalization-weighted index and a float-adjusted market-capitalization-weighted index.

Market-capitalization-weighted index

A market capitalization-weighted index is calculated by multiplying the price of each asset in the index by its number of outstanding shares and summing the resulting values. The weighting of each asset in the index is determined by its market capitalization, so that the largest and most influential companies have the greatest impact on the overall performance of the index.

The formula for a market-capitalization-weighted index is given by

Market Capitalization Index value

In a market capitalization-weighted index, the weight of asset k is given by formula can be rewritten as

Market Capitalization Weighted Index Weight

Which clearly shows that the weight of each asset in the index is its market capitalization of the asset divided by the sum of the market capitalizations of all assets.

Float-adjusted market-capitalization-weighted index

In a float-adjusted market-capitalization-weighted index, the market-capitalization weight of each asset is adjusted for its market float. It is also called a free float. Instead of taking into account shares held by insiders, governments, or other entities that might not be available for trading, the weight is adjusted based on the percentage of shares that are actually traded on the open market.

This differs from the market capitalization weighted index as it accounts for the shares outstanding of a company. A float-adjusted market capitalization-weighted index only takes into account shares that are freely available for trading, whereas a market capitalization-weighted index takes into account all outstanding shares, providing a more accurate picture of the performance of the market.

The formula for a float-adjusted market-capitalization-weighted index is given by

Float Adjusted Market Capitalization Index value

Where I is the index value, k a given asset, K the number of assets in the index, P^k the market price of asset k, N^k the number of issued shares for asset k, F^k the float factor of asset k, and t the time of calculation of the index.

In a float-adjusted market-capitalization-weighted index, the weight of asset k is given by formula can be rewritten as

Float Adjusted Market Capitalization Weighted Index Weight

Why should I be interested in this post?

As a key idea in finance and investment, float should be covered by management students. Float has important effects on both managers and investors. Analyzing a company’s financial statements can also benefit from having a solid understanding of floats. When making a choice, a management student who is researching a company’s stock as a potential investment should keep this in mind.

Useful resources

Bankrate What is a stock float
Business Insider Floating stock: Why it’s important for investors to know a company’s float

CFI What is Floating Stock?

The Economic Times Float and IPO

Russel How are indexes weighted?

About the author

The article was written in April 2023 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023).

Money is a terrible master but an excellent servant

January 30, 2024April 7, 2023 by Fatimata KANE

“Money is a terrible master but an excellent servant”

In this article, Fatimata KANE (ESSEC Business School, Master in Strategy & Management of International Business, 2022-2023) comments on a quote by Phineas Taylor Barnum about money management.

“Money is a terrible master but an excellent servant.”

Analysis of the quote

This quote by Phineas Taylor Barnum reflects the idea that while money can be a powerful tool to achieve our goals and desires, it can also become a source of stress and anxiety when we become too attached to it. The key is to use money as a servant to achieve our objectives, rather than allowing it to become our master and controlling our lives.

About the author

Phineas Taylor Barnum, also called P.T. Barnum, was an American showman and entrepreneur who lived in the 19th century. He is best known for founding the Barnum & Bailey Circus, which became known as “The Greatest Show on Earth.” Barnum was also a politician, author, and philanthropist, and he is famous for his promotional skills and his ability to attract audiences to his shows through various forms of advertising and publicity stunts. However, some of his displays, such as the exhibition of people with physical abnormalities or disabilities, have been criticized for being exploitative.

Financial concepts related to the quote

Financial Independence

The concept of financial independence is related to using money as a servant rather than a master. It involves achieving a level of financial stability and freedom where you have enough resources to support your desired lifestyle without being overly dependent on a job or other external factors.

Budgeting

Budgeting is a financial concept that involves creating a plan for how you will spend your money. When we use money as a servant, we create a budget that aligns with our values and goals, and we use our resources to support those priorities.

Opportunity Cost

Opportunity cost is the concept that every decision has a cost, and we must weigh the potential benefits against the potential drawbacks. When we use money as a servant, we make conscious decisions about how we spend our money, considering the opportunity cost of each option.

My opinion about this quote

I strongly agree with P.T. Barnum’s quote that “Money is a terrible master but an excellent servant”. While money is an important resource that can help us achieve our goals and live our desired lifestyle, it should never become our primary focus or source of stress. Instead, we should view money as a tool that can support our values and priorities, rather than allowing it to control our lives. By using money as a servant, we can achieve financial stability and independence, create a budget that aligns with our values, and make conscious decisions about how we use our resources to achieve our goals.

Why should I be interested in this post?

Financial literacy and money management philosophy are directly touched upon by this quote, which is why it could be of much interest to you, as a business school student.

Useful resources

Learn more about P.T. Barnum (in French)

About the author

The article was written in April 2023 by Fatimata KANE (ESSEC Business School, Master in Strategy & Management of International Business, 2022-2023).

My internship experience as a marketing intern at Amazon

April 5, 2023 by Fatimata KANE

My internship experience as a marketing intern at Amazon

In this article, Fatimata KANE (ESSEC Business School, Master in Strategy & Management of International Business, 2022-2023) shares her professional experience as a marketing intern at Amazon.

About the company

Amazon is a multinational technology company that was founded in 1994 by Jeff Bezos. Originally started as an online bookstore, the company has since expanded to become the world’s largest online retailer, selling a vast array of products and services across various categories, including electronics, fashion, home goods, groceries, and digital content.

Logo of Amazon.

Source: the company.

In addition to its e-commerce platform, Amazon has also expanded into other areas such as cloud computing (Amazon Web Services), digital streaming (Amazon Prime Video), smart home devices (Amazon Echo), and artificial intelligence (Amazon Alexa). The company is headquartered in Seattle, Washington, and operates in over 200 countries worldwide.

Amazon is known for its customer-centric approach and has a reputation for offering fast and convenient delivery options, competitive pricing, and a wide selection of products. The company’s mission statement is to “be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online.”

Amazon France

Amazon France is the French subsidiary of Amazon, which is the world’s largest online retailer. The company’s French website, Amazon.fr, was launched in 2000 and offers customers in France a wide selection of products across various categories, including electronics, books, fashion, home goods, and more.

As of 2021, Amazon France has over 22,000 employees and operates several distribution centers and warehouses throughout the country to ensure fast and reliable delivery to customers. The company also offers various delivery options, including same-day delivery and Amazon Prime, which provides free shipping and access to additional services such as streaming video and music.

I worked as a General Marketing Specialist Intern at Amazon France, in the retail business unit.

My internship

As a general marketing specialist intern at Amazon.fr, my role was to support the retail team in executing various marketing campaigns and initiatives to drive traffic, sales, and customer engagement on the website.

My missions

For example, I could assist in creating and publishing content on Amazon.fr’s social media accounts to promote products and engage with customers. This could include writing copy, designing graphics, and scheduling posts. I also created email campaigns to promote new products, sales, and other marketing initiatives. This could involve designing email templates, writing copy, and analyzing performance metrics.

I could also assist in managing Amazon.fr’s search engine marketing (SEM) campaigns to increase visibility and drive traffic to the website. This could involve keyword research, ad copy creation, and performance monitoring. Besides marketing content creation, I also oversaw auditing the marketing performances, and designed marketing plans for brands.

Required skills and knowledge

Working in this role required creativity, eagerness to learn, good communication skills, and high prioritization capacity.

What I learned

My internship experience with Amazon provided me with exceptional learning opportunities.

First, Amazon has a strong customer-centric approach, and this is reflected in all aspects of its marketing strategy. As an intern, I learned the importance of understanding customer needs and preferences and creating marketing campaigns that resonate with them.

Moreover, Amazon relies heavily on data analysis to inform its marketing decisions, and I had the opportunity to work with various analytics tools to measure the performance of marketing campaigns. This helped me develop a better understanding of the importance of data-driven decision-making.

Furthermore, in a large organization like Amazon, collaboration is essential. As an intern, I had the opportunity to work with different teams and departments to execute marketing campaigns. This taught me the importance of effective communication and teamwork.

Plus, Digital marketing is constantly evolving, and Amazon is at the forefront of innovation in the industry. As an intern, I had access to various training resources and had the opportunity to attend industry events and webinars to stay up-to-date with the latest trends and best practices.

Lastly, Amazon has a reputation for providing a seamless customer experience, and this requires a high level of attention to detail in all aspects of marketing. I thus learned the importance of quality assurance and attention to detail in all aspects of marketing campaigns, from copywriting to design.

Overall, my experience as a general marketing specialist intern at Amazon.fr was invaluable in helping me develop a better understanding of digital marketing and how it can be used to drive business growth and customer satisfaction.

Financial concepts related my internship

Although not focused on finance, my internship in marketing still allowed me to be in touch with several financial concepts such as:

Return on Investment (ROI)

As a marketing intern, I learned the importance of measuring the ROI of marketing campaigns. This involves calculating the revenue generated by a campaign compared to the cost of the campaign. This concept is related to financial analysis, where businesses must analyze the return on investment for any project or initiative.

Cost of Goods Sold (COGS)

COGS is a financial concept that represents the direct costs associated with producing and selling a product or service. As an intern, I learned how Amazon calculates the COGS for each product and how this impacts pricing and profitability.

Gross Margin

Gross margin is a financial concept that represents the difference between revenue and COGS. As an intern, I learned how Amazon manages its gross margin by optimizing pricing strategies, managing inventory levels, and reducing costs.

Why should I be interested in this post?

I greatly appreciated my experience at Amazon and would recommend the company to any curious and eager-to-learn individual who is interested in marketing and retail.

Useful resources

Amazon France

About the author

The article was written in April 2023 by Fatimata KANE (ESSEC Business School, Master in Strategy & Management of International Business, 2022-2023).

Automation in Audit

April 4, 2023 by Federico MARTINETTO

Automation in Audit

In this article, Federico MARTINETTO (ESSEC Business School, Exchange Global BBA, 2021) explains about the importance of the data automation in the audit process.

Why is intelligent automation important for the audit processes?

Traditional auditing has the following problems, for which intelligent automation can provide a solution:

It relies on manual labor of intensive data collection and examination, which makes traditional auditing costly, time-consuming, and error-prone.
It relies on sampling, where a representative sample of the data is selected to identify risks. This is because examining the entire data is expensive and time-consuming. If the selected data is not representative of the population being tested, auditors may conclude that there are more or fewer problems than actually exist. This problem is referred to as sampling risk.

By leveraging RPA and AI, intelligent automation:

Reduces the time spent on repetitive and tedious auditing tasks such as data collection, data extraction, or reporting. Human intelligence and talent can then be deployed in more value-added processes.
Enables a more granular data analysis by reviewing all available data automatically instead of sampling. As a result, auditors will gain a better understanding of an organization’s risk and be able to focus on high-risk documents and anomalies.

PwC, one of the world’s leading providers of audit, consulting, tax and advisory services, created RPA bots to streamline report development for monthly management, accounts receivable and travel expense reports. Report development time was reduced from one week to minutes with a suite of IBM RPA bots.

How does intelligent automation improve the audit processes?

Faster and more comprehensive data collection and cleaning.

Whether it is an internal or external audit, auditors gather evidence about business processes from a variety of sources such as process documents, invoices, system logs, or reports. Gathering data from unstructured sources is burdensome when executed manually. Intelligent automation tools can read and understand the context of documents with NLP and intelligent document processing technologies. This enables intelligent bots to:

Automatically convert unstructured data to a structured format
Perform calculations with extracted data
Combine data from different sources and input it into a target file.

As a result, auditors can review the entire population instead of just a sample in a fraction of the time it would take to perform a manual audit.

In addition to statistical analysis and visualizations, intelligent bots can perform analyses on gathered data with machine learning algorithms and identify anomalies such as potential fraud or suspicious IT logs, according to predetermined rules. By flagging these anomalies, auditors can focus on high-risk areas throughout the population.

Moreover, AI-enabled bots can learn and adapt to datasets so they can improve the accuracy of anomaly detection over time.
For instance, researchers from Rutgers University implemented an RPA bot for a public accounting firm. While testing the deployed bot, the researchers overstated the loan amount balance of some transactions, and the bot could detect all the anomalies.

Reduction in manual work can allow auditors to conduct audits more often. This can help businesses to adapt to the ever-changing business environment and provide a higher level of assurance. Intelligent bots can also continuously monitor determined controls in real-time and flag issues for further examination by auditors.

Three steps for implementing intelligent automation in audit

Step 1: Identify processes suitable for automation

It is important to understand how different audit processes are carried out in order to determine which ones should be automated. By using event logs and other process-related data, auditors can leverage process mining to identify process patterns and deviations and create full visualizations of processes. Most major intelligent automation vendors also provide process mining capabilities.

This higher-level understanding enabled by process mining helps auditors to determine which audit processes:

are repetitive, rule-based, and time-consuming. These processes are low-hanging fruits for automation.
require human judgment and professional skepticism. Auditors can define the rules governing human judgment for these processes and have bots flag cases that deviate from them for further examination.

Step 2: Test your bots to ensure that they function as desired

After determining the processes for automation and building bots for them, auditors should test the bots in a controlled environment to ensure:

They carry out the tasks they are designed for without issues
They handle exceptions well and route the exception to relevant staff.

Step 3: Monitor your automated processes and identify areas for improvement

Auditors should monitor the deployed bots to ensure that they continue functioning as expected. This is because:

You may discover areas for improvement after deployment
Bots can encounter data or exceptions that were not included in the test phase
The business environment is constantly changing, so bots’ performance could degrade over time.

Why should I be interested in this post?

You should be fascinated in this post if the audit process and the analysis of data and their transformation into essential information fascinates you. Technology and all the most innovative tools are a puzzle to solve.

About the author

The article was written in April 2023 by Federico MARTINETTO (ESSEC Business School, Exchange Global BBA, 2021).

Money never sleeps

February 16, 2025April 4, 2023 by Federico MARTINETTO

Money never sleeps

In this article, Federico MARTINETTO (ESSEC Business School, Exchange Global BBA, 2021) comments on a quote from Gordon Gekko in the famous Wall Street film.

Quote: Money never sleeps

The quote “Money never sleeps” is a famous line from the 1987 film “Wall Street” and has become a popular saying in popular culture. The phrase “money never sleeps” is commonly used in the context of financial markets and reflects the idea that financial activity never truly ceases, even outside of traditional business hours. This reflects the fast-paced nature of the global financial system, where transactions can occur at any time and from any location around the world. This concept is particularly relevant in the field of finance and investment, where the value of stocks, bonds, and other securities can fluctuate rapidly based on changes in market conditions or geopolitical events. As such, traders and investors must remain vigilant and stay informed about market developments, as opportunities and risks can arise at any time.

The idea that “money never sleeps” also highlights the interconnectedness of the global financial system, where events in one part of the world can have significant impacts on financial markets and economic activity in other regions. As a result, the ability to respond quickly and effectively to market changes is critical for success in the world of finance and investment.

Overall, the phrase “money never sleeps” reflects the dynamic and constantly evolving nature of the global economy, where financial activity never truly stops, and opportunities and risks can arise at any time.

Analysis of the quote

The quote “money never sleeps” can be analyzed as a reflection of the constantly changing and dynamic nature of financial markets. The phrase suggests that financial activity is always occurring, even outside of traditional business hours, and that investors and traders must be vigilant and responsive to changes in order to succeed.

One of the key factors that drives the ongoing nature of financial activity is the 24-hour nature of global financial markets. Financial exchanges around the world operate in different time zones, meaning that trading activity can occur at any time. This means that traders and investors must be prepared to respond quickly to market changes, even if they occur outside of normal working hours.

In addition to the 24-hour nature of financial markets, the phrase “money never sleeps” also reflects the rapid pace of financial activity. Financial markets are characterized by their fast-paced nature, with changes in market conditions or geopolitical events leading to rapid fluctuations in the value of securities. This creates both opportunities and risks for traders and investors, who must remain alert and responsive to these changes in order to make informed investment decisions. Furthermore, the interconnectedness of global financial systems is a third factor that contributes to the ongoing nature of financial activity. Events in one part of the world can have significant impacts on financial markets and economic activity in other regions. This means that traders and investors must be aware of global market trends and be prepared to adapt to changing circumstances in order to succeed.

From an academic perspective, the quote “money never sleeps” highlights the importance of remaining vigilant and responsive to changes in financial markets. By doing so, investors and traders can position themselves to take advantage of opportunities and manage risks in order to achieve their investment objectives. Additionally, the ongoing nature of financial activity underscores the importance of financial literacy and education, as individuals must be prepared to make informed decisions in an ever-changing financial landscape.

About the author

Gordon Gekko is a fictional character who appears as the villain in the popular 1987 Oliver Stone movie “Wall Street” and its 2010 sequel “Wall Street: Money Never Sleeps.” The character, a ruthless and wildly wealthy investor and corporate raider, has become a cultural symbol for greed, as epitomized by the famous “Wall Street” quote “Greed is good.”

In “Wall Street,” the protagonist, a young stockbroker named Bud Fox, is desperate to work with Gordon Gekko, who is a legend in the world of finance. Predatory, amoral Gekko is only impressed when Fox is willing to compromise his ethics and provide Gekko with inside information about his father’s company. Gekko makes Fox wealthy, but eventually, Fox regrets what he has done and turns state’s evidence against Gekko, who is sent to prison for securities fraud and insider trading.

For his portrayal of Gordon Gekko in the original film, Michael Douglas won an Academy Award.

Financial concepts related to the quote

The quote “money never sleeps” can be said to refer to three key financial concepts: the 24-hour nature of global financial markets, the rapid pace of financial activity, and the interconnectedness of global financial systems.

The 24-hour nature of global financial markets

One of the key reasons why “money never sleeps” is a relevant concept in finance is the 24-hour nature of global financial markets. Financial exchanges around the world operate in different time zones, meaning that trading activity can occur at any time. For example, the New York Stock Exchange is open from 9:30am to 4:00pm Eastern Time, while the Tokyo Stock Exchange operates from 9:00am to 3:00pm Japan Standard Time. This means that financial transactions can occur at any time, even outside of traditional business hours.

The rapid pace of financial activity

Another reason why “money never sleeps” is an important concept in finance is the rapid pace of financial activity. Financial markets are characterized by their fast-paced nature, with changes in market conditions or geopolitical events leading to rapid fluctuations in the value of securities. This can create both opportunities and risks for traders and investors, who must remain alert and responsive to these changes in order to make informed investment decisions.

The interconnectedness of global financial systems

The interconnectedness of global financial systems is a third reason why “money never sleeps” is a relevant concept in finance. Events in one part of the world can have significant impacts on financial markets and economic activity in other regions. For example, a change in monetary policy by the US Federal Reserve can impact the value of the US dollar and influence economic activity in other countries that trade with the US. This means that financial activity never truly stops, as the effects of market changes and economic events can continue to reverberate around the world.

Overall, the phrase “money never sleeps” reflects the dynamic and constantly evolving nature of the global economy, where financial activity never truly ceases, and opportunities and risks can arise at any time. As a result, traders and investors must remain alert and responsive to changes in financial markets and be prepared to adapt to changing circumstances in order to achieve their investment objectives.

My opinion about this quote

I like so much this quote because it means there are opportunities to make money at any time of the day. One reason why I find the quote appealing is because it suggests a sense of excitement and energy. The phrase implies that financial markets are always active, and that there is always something happening that can impact the value of securities or other financial instruments. For some people, this sense of constant motion and activity can be invigorating and attractive.

Additionally, the quote can be seen as a reminder of the importance of remaining engaged and aware in the pursuit of financial success. By suggesting that “money never sleeps”, the quote underscores the idea that financial markets are always evolving and changing, and that individuals who are not actively engaged in managing their investments may miss out on opportunities or be exposed to unnecessary risks.

Moreover, the quote can also be interpreted as reflective of the importance of hard work and dedication in the pursuit of financial success. The phrase “money never sleeps” suggests that financial success is not achieved through passive investment strategies, but rather through active engagement and a willingness to put in the time and effort required to stay informed and make informed decisions.

For individuals who are interested in finance and investing, the quote can be seen as a motivational reminder of the importance of remaining engaged and committed to achieving one’s financial goals. It encourages individuals to remain vigilant, respond quickly to changes in financial markets, and continually seek out opportunities to maximize their returns.

In conclusion, the quote “money never sleeps” can be appealing for a variety of reasons, including its suggestion of excitement and energy, its reminder of the importance of remaining engaged and aware in the pursuit of financial success, and its emphasis on the importance of hard work and dedication.

Why should I be interested in this post?

The quote “Money never sleeps” relates to the SimTrade certificate in different ways.

Concerning the practice by launching the Efficient market simulation, you will practice how information is incorporated into market prices through the trading of market participants and grasp the concept of market efficiency. By launching the Sending an order simulation, you will practice how financial markets really work and how to act in the market by sending orders.

Regarding the theory for example by taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency. By taking the Trade orders course, you will know more about the different type of orders that you can use to buy and sell assets in financial markets.

Useful resources

SimTrade course Trade orders

SimTrade course Market information

SimTrade course Leverage

SimTrade simulations Efficient market

About the author

The article was written in April 2023 by Federico MARTINETTO (ESSEC Business School, Exchange Global BBA, 2021).

My experience as a PwC Associate Auditor in the Digital Data Hub

April 4, 2023 by Federico MARTINETTO

My professional experience as a PwC Associate Auditor in the Digital Data Hub

In this article, Federico MARTINETTO (ESSEC Business School, Exchange Global BBA, 2021) shares his professional experience as a PwC Associate Auditor in the Digital Data Hub.

About the company

PwC is a global professional services firm providing audit, tax, consulting, and advisory services to clients in various industries. With a network of over 284,000 employees in more than 157 countries, PwC serves multinational corporations, public sector entities, and emerging businesses. The company is committed to innovation, diversity, inclusion, and corporate social responsibility.

Logo of PwC.

Source: the company.

In the department I work for, we provide comprehensive audit and assurance transformation services to give real value for our clients. We offer three types of services: Risk Assurance, Capital Markets & Accounting Advisory Services, and Financial Statement Audit (EN).

Risk Assurance

The uncertainties facing companies today vary between known risks, emerging risks and potentially global risk scenarios. Risk Assurance services improve the “resilience” of your business by helping management make informed decisions.

Capital Markets & Accounting Advisory Services

Thanks to our expertise, we will assist you in dealing with the regulatory aspects related to operations of access to the capital and debt markets (from going public to being public)as well as financial reporting issues considering their potential impacts on financial communications with stakeholders, including through the use of advanced digital solutions.

Financial Statement Audit (EN)

A financial statement audit is the examination of an entity’s financial statements and accompanying disclosures by an independent auditor. The result of this examination is a report by the auditor, attesting to the fairness of presentation of the financial statements and related disclosures. The auditor’s report must accompany the financial statements when they are issued to the intended recipients.

My job

I support the audit teams in the development and implementation of digital audit tools leveraging advanced data analytics and automation solutions.

My missions

I work with state-of-the-art technologies to provide high-quality audits, gaining in-depth expertise on technology and data through a structured training program. I can get in touch and interact with domestic and international customers.

Required skills and knowledge

I am within a team that relies on flexibility and agility to solve important problems for our customers. You need excellent writing and speaking skills in English.

What I learned

I am developing a deep understanding of the role that digital plays in the new form of audit process.

Financial concepts related my job

During my job the following concepts were useful: digital transactional platform, digital financial inclusion, and retail agents.

Digital transactional platform

A digital transactional platform enables a customer to use a device to make or receive payments and transfers and to store value electronically with a bank or nonbank permitted to store electronic value.

Digital financial inclusion

“Digital financial inclusion” can be defined broadly as digital access to and use of formal financial services by excluded and underserved populations. Such services should be suited to customers’ needs, and delivered responsibly, at a cost both affordable to customers and sustainable for providers.

Retail agents

Retail agents armed with a digital device connected to communications infrastructure to transmit and receive transaction details enable customers to convert cash into electronically stored value and to transform stored value back into cash. Depending on applicable regulation and the arrangement with the principal financial institution, agents may also perform other functions.

Why should I be interested in this post?

You should be interested in this post, if you have always wanted to see for yourself what it means to work for a big 4. If you have always dreamed of making a difference, helping companies to design their future. The analysis of data and their transformation into essential information fascinates you. Technology and all the most innovative tools are a puzzle to solve. You like to play with passion and without limits. You stand out for empathy, proactivity, and versatility.

Useful resources

PwC

PwC Careers with PwC

About the author

The article was written in April 2023 by Federico MARTINETTO (ESSEC Business School, Exchange Global BBA, 2021).

The investment ecosystem

March 31, 2024March 22, 2023 by Nithisha CHALLA

The investment ecosystem

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023) explains the investment ecosystem in financial markets.

Introduction

In the investment ecosystem, there are several blocks to understand: market participants, market products, and market organization.

Market participants

Market participants are individuals, companies, financial institutions, and governments. Some of these participants may issue assets like companies (stocks, commercial paper, and bonds) and governments (bonds). Some of these participants may invest in these assets like individuals or pension funds.

Based on the amount they invest, market participants are segregated as big players and small players. Big players are mostly institutional investors which collect the funds and then invest them. Few examples of institutional investors are mutual funds, pension funds, hedge funds, trusts, charities etc. Big players may also be wealthy individuals (high net worth individuals or HNWI) or family offices. Small players are other individual investors.

Corporates run businesses, including manufacturing, service, and technology firms, and they need capital to expand and maintain their operations. On the other side, we have institutions that consist of fund managers that could be institutional investors but also retail investors as well. These are the people that have capital so the capital flows from the institutions or investment managers who have the money to the corporations that need that money to grow and run their business. The cycle between the two parties is completed when the firms issue back to the investor’s bonds, which are classified as debt, or shares, which are classified as equity.

In the middle of these two groups sit the investment banks they are often referred to as the sell side and they have contacts on both sides of these players. They have corporate clients, and they have institutional investor clients, their job is to match up the institutional investors with the corporates based on risk and return assessments and expectations and investment style to get the deal done. In addition, we have public accounting firms which are the fourth player in the market.

Market Products

Assets

What are assets? In financial language, an asset is that which has some economic value. And assuming that its value increases in the future market participants buy them and that is how it is a part of the investment ecosystem. Few examples for assets are fixed deposit, land, gold, stock, etc.

Asset classes are made up of those investments or securities whose characteristics are the same. Few major asset classes are equity, bonds (fixed income), commodities, and real estate.

Instruments

What are Instruments? Instruments are the ways through which we can invest in different asset classes.

Some of the major instruments we see in markets are direct investing, mutual funds, and exchange-traded funds (ETFs).

Direct investing is nothing but investing cash physically in different asset classes or we can digitally buy assets through our accounts
Mutual funds are the funds collected by multiple investors and then those are invested in different asset classes. To manage these mutual funds, we have fund managers who will invest on behalf of investors.
ETFs are nothing but a basket of securities just like mutual funds, but the only difference is they are traded on stock exchanges.

Market organization

Primary and secondary markets

The primary markets: the initial issuance of assets

The primary market is where new securities, including stocks, bonds, and other financial assets, are first issued by governments or corporations. The primary market is also referred to as the market for new issues.

Companies and governments raise money in the primary market by offering their securities to retail or institutional investors. The securities may be sold through a private placement or an initial public offering (IPO).

There are four main players in the primary market mainly for issuance of securities.
1) Corporates
2) Investors: institutional investors and individual investors
3) Corporate banks
4) Public accounting firms

The secondary markets: the exchange of assets

In the secondary market, fund managers and banks collaborate to trade securities between investors after they have already been issued. On one side, a fund manager may want to purchase securities of a public company, while on the other, a different fund manager may wish to sell those same securities. Investment bankers come between these clients to help facilitate these trades, and this trade is facilitated over the stock exchange. They provide equity research coverage to help fund managers make decisions about buying and selling those securities. And this secondary market trading makes markets liquid. This is what allows you to get in and out of security very easily.

Market infrastructure

Infrastructure providers are the companies which enable the transactions and functioning of different instruments. It means all the digital and physical infrastructure required for the investor is provided by the infrastructure provider. The few common examples of an infrastructure provider are the stock exchange, depositories, and registrar and transfer of agents.

Stock exchange: It is the platform where you can sell and buy securities. Here, with the help of a broker and the stock exchange two investors can buy and sell stocks without knowing each other. For example, The TSE is the largest stock exchange in Asia by market capitalization. It is located in Tokyo, Japan and has over 3,500 listed companies.
Depositories: These are the companies that store the stocks we buy in electronic form. We can store these stocks through our demat accounts. Depositories help you transfer stock and various other functions like checking the statements, portfolio holdings and transaction information etc. Generally investors directly do not interact with depositories but they approach through a broker who would invest on their behalf. For example: The DTC is one of the largest depositories in the world. It is located in New York City and holds over 3.5 million securities worth trillions of dollars.
Registrar and Transfer of Agents (RTA): just like depositories in case of stocks, RTA’s in case of mutual funds. All trades of mutual funds like subscription, redemption, and transfer, are recorded by an RTA. An RTA also helps mutual fund investors in providing their portfolio and statements to them.

Why should I be interested in this post?

As a student and prospective business management graduate, I think it is important to know the investment ecosystem. Firstly, investments play a vital role in the growth and success of companies. Companies need investments to fund their operations, expand their businesses, and create value for their shareholders. Therefore, understanding the investment ecosystem will enable management students to make informed decisions regarding investments that can help drive the growth of the companies they work for or manage in the future.

Useful resources

McKinsey (2017) Capital Markets Infrastructure: An Industry Reinventing Itself

Black rock The Investment Stewardship Ecosystem

About the author

The article was written in March 2023 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023).

High-frequency trading and limit orders

February 16, 2025March 22, 2023 by Clara PINTO

High-frequency trading and limit orders

In this article, Clara PINTO (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2023) explains about high frequency trading in a dynamic limit order market.

What is High-frequency trading (HFT)?

While the adage “time is money” applies to almost all economic operations, the rapid spread of computerized trading has carried this quote to its final extreme. High-frequency trading (HFT) is a type of algorithmic trading that relies on advanced computer programs to make trading decisions and execute trades in a matter of milliseconds. HFT has become increasingly popular in recent years, particularly in dynamic limit order markets (“A dynamic limit order market with fast and slow traders”, European Central Bank), where the bid and ask prices of securities are constantly changing. This allows them to take advantage of small price discrepancies in the market and generate profits on a large scale, this method known as statistical arbitrage, involves traders looking for temporary pricing inconsistencies across different exchanges and capitalize on it, using ultra-fast transactions.

What Exactly Is a Limit Order?

A limit order is an instruction to buy or sell a security at a specified price or better. For example, a trader may place a buy limit order for a stock at $50, meaning he or she is willing to buy the stock only if it is available at that price or lower. Similarly, a sell limit order may be placed at $60, meaning the trader will sell the stock only if the price is at that level or higher.

HTF and Limit Order

High-frequency trading (HFT) and limit orders are closely linked, as HFT traders often rely on limit orders to execute their trades. In fact, limit orders are a key component of many HFT trading strategies. HFT traders often use limit orders in conjunction with advanced algorithms to identify market trends and execute trades at lightning-fast speeds. They may place many limit orders at various prices to take advantage of small price movements in the market and use sophisticated algorithms to determine the best time to execute their trades.

However, the use of limit orders in HFT trading can also have downsides. For example, the large number of limit orders placed by HFT traders can lead to increased volatility in the market, as these orders can cause sudden price movements, for example flash crash when the prices of stocks or commodities suddenly plunges but then quickly recovers. Hence, the use of limit orders in HFT trading can also have downsides, and it is important for regulators to monitor HFT activity and ensure that it does not cause market instability or unfair trading practices.

Why should I be interested in this post?

For many business school students, finance and trading are part of the most preferred jobs. Understanding the trends in high-frequency trading is now a requirement for future institutional investors. Being quick allows traders to adjust outstanding limit orders in response to news arrivals when working with “slow” market players who experience a relative loss in bargaining power, leading them to strategically submit limit orders with a lower execution probability, limiting trade.

Useful resources

SimTrade course Trade orders

Hoffmann P. (2013) A dynamic limit order market with fast and slow traders European Central Bank Working Paper Series.

Lewis M. (2015) Flash boys Norton & Company.

About the author

The article was written in March 2023 by Clara PINTO (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2023).

Strategy and Tactics: From military to trading

March 22, 2023 by Clara PINTO

Strategy and Tactics: From military to trading

In this article, Clara PINTO (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2023) shares her insights as a former military analyst on strategy and tactics applied to trading.

IRSEM: The Institute for Strategic Research at the Military School

Created in 2009, IRSEM is the strategic research institute of the French Ministry of Armed Forces and operates under the supervision of the Directorate General for International Relations and Strategy (DGRIS) operating under the umbrella of the Ministry for the Armed Forces. IRSEM is home to a staff of about forty civilian and military permanent researchers. The Institute seeks to foster the emergence of a new generation of researchers specialized in security and defense issues.

Logo of IRSEM.

Source: IRSEM.

From military to Finance: Strategy and tactics applied to trading

My experience as an analyst in a military Think tank required me to learn the basics of military strategy and tactics. The distinction between strategy and tactics is frequently stated as “strategy is long-term, whereas tactics are short-term.” While the two terms may exhibit similar qualities at times, it is an erroneous and partial explanation of their definitions.

Chinese General Sun Tzu wrote the difference this way: “All the men can see the tactics I use to conquer, but what none can see is the strategy out of which great victory is evolved.”

However, even if strategy and tactics are also used in business, their principles still apply in the trading context. Indeed, successful trading requires a solid understanding of both strategy and tactics. In this article, we will explore the differences between these two concepts and how they can be applied to trading.

Strategy refers to a long-term plan that outlines how you will achieve your trading goals. It involves identifying your objectives, assessing the risks and opportunities in the market, and deciding on a plan of action. A good trading strategy should be flexible enough to adapt to changing market conditions, but also structured enough to provide a clear path forward. One key aspect of a trading strategy is risk management. This involves identifying the potential risks associated with a particular trade and taking steps to mitigate them. This might involve setting stop-loss orders to limit potential losses or diversifying your portfolio to reduce the overall risk. A good trading strategy should also take into account the amount of capital you have available to trade with, as well as your risk tolerance and investment goals.

Tactic, on the other hand, refers to the specific actions you take to implement your trading strategy. These might include analyzing technical indicators to identify trends and patterns to assess the value of a particular asset. A successful trading tactic will depend on a number of factors, including the specific asset you are trading, and the current market conditions.

Ultimately, the success of your trading will depend on how well you are able to combine strategy and tactics. A strong strategy will provide a clear framework for making decisions and managing risk, while effective tactics will allow you to execute that strategy in a way that maximizes your returns. In order to develop a successful trading strategy, it is important to conduct thorough research and analysis of the markets you are interested in. This might involve studying historical market trends, analyzing economic and political factors that could impact the markets, or keeping up to date with news and events that could affect the value of specific assets. It is also important to remember that trading involves a degree of risk, and no strategy or tactic can guarantee success. However, by developing a strong strategy and using effective tactics to execute that strategy, you can improve your chances of making profitable trades over the long term.

In conclusion, strategy and tactics are both essential components of successful trading. A strong trading strategy provides a clear framework for decision-making and risk management, while effective tactics allow you to execute that strategy in a way that maximizes your returns. By combining careful research and analysis with disciplined execution, you can increase your chances of success in the complex and ever-changing world of trading.

Why should I be interested in this post?

Unfortunately, the concepts of strategy and tactics are often mixed up and not entirely understood. However, they provide a good framework to trade in the long term and structure your choices in the decision-making process.

Useful resources

IRSEM – The Institute for Strategic Research

About the author

The article was written in March 2023 by Clara PINTO (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2022-2023).

Investment is a flighty bird which needs to be controlled

March 22, 2023 by Clara PINTO

“Investment is a flighty bird which needs to be controlled”

In this article, Clara PINTO (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2023) comments on a quote by Sir John Richard Hicks about investing.

Investment is a flighty bird which needs to be controlled

“Investment is a flighty bird which needs to be controlled” is a famous quote from Sir John Richard Hicks.

This quote means that investment is unpredictable and can easily change direction or fly away, so it needs to be managed or controlled carefully. Just like a bird, investment can be difficult to catch and keep in one place, so investors need to constantly monitor and adjust their strategies to ensure that their investments are secure and profitable. Without proper control over the portfolio and monitoring of the news, an investor can make decisions which could be risky and lead to financial losses.

About the author

The author is a British neo-Keynesian theorist and considered as one of the most influential economists of the XXth century.

Financial concepts related to the quote

It is important to understand the risks associated with investing before making any investment decisions. It is also important to diversify your portfolio by investing in a variety of different assets, to minimize the risk of losses due to the failure of any single investment. Additionally, investors should consider their investment goals, time horizon, and risk tolerance when making investment decisions. Some common risks associated with investing include:

Market Risk: The possibility of losing money due to the fluctuations in the stock market, commodity prices, or interest rates.
Credit Risk: The risk of losing money when a borrower fails to repay a loan or debt.
Inflation Risk: The risk that the purchasing power of your investments will decrease due to inflation.
Liquidity Risk: The risk that an investment cannot be sold quickly enough to avoid a loss.
Operational Risk: The risk of losing money due to errors, fraud, or other operational problems.

My opinion about this quote

I like this quote because today, many successes such as the Pinduoduo investment story about investment are shared (see the article “five investing success stories from five international women”), but without the proper knowledge and understanding of the risks, the loss that can occur is often underestimated.

Why should I be interested in this post?

As many business students are advised to invest early in their careers, and many are offered the chance to do it with money that they did not earn by themselves, this quote shall remind them of the consequences of bad decision making and the risks.

Useful resources

4 Real Risks Of Investing (And What To Do About Them)

Five Investing Success Stories from Five International Women

Pin Duo Duo

About the author

The article was written in March 2023 by Clara PINTO (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2022-2023).

My experience as a leisure tourism management assistant in the French Tourism Development Agency

March 21, 2023 by William LONGIN

My experience as a leisure tourism management assistant in the French Tourism Development Agency

In this article, William LONGIN (EDHEC Business School, Global BBA, 2020-2024) shares his experience as a leisure tourism management assistant at Atout France USA, which is the French Tourism Development Agency in the United States of America.

Atout France

Atout France is the official French National Tourism Development Agency. It is a government agency responsible for promoting France as a tourism destination to visitors and tourism professionals (tour operators and travel agents) from around the world.

Logo of the Atout France.
Logo of Atout France
Source: Atout France.

Atout France was created in 2009 through the merger of three existing organizations that focused on tourism promotion: Maison de la France, ODIT France, and France Tourism Development Agency. The name Atout France comes from “Atout” meaning asset and “France” the nation that it services. The agency’s main mission is to develop and implement strategies for promoting France as a tourism destination by working with French companies and tourism professionals from around the world. We will explore the strategies used by Atout France in more depth in this article.

Atout France objectives are set by the French government and reflect the needs of French businesses in the tourism sector. To attain the objectives set by the government, Atout France organizes and attends multiple business-to-business (B2B) events to create visibility and encourages French networking. Another key objective set by the French government is promoting the new offers for sustainable tourism called eco-tourism, still overlooked by many international travelers. For example, Atout France in the United States launched an e-learning platform covering eco-tourism in France.

I interned in the branch of Atout France located in New York, as a “leisure tourism manager assistant”. As a foreign worker in the United States, I was granted a diplomatic A2 Visa for my internship. Kind of cool! My experience in New York was really valuable in addition to the experience I had in the company as I was able to make many friends and discover the city through a new lens (a worker and not a tourist). Indeed New York is home to many international institutions such as the United Nations, many consulates, and schools such as New York University (NYU) and Columbia University. New York, also called the Melting Pot, has a developed French community and culture particularly in the areas of art, cuisine, and fashion. The numerous French restaurant venues in the city allows Atout France to showcase French cuisine when organizing events. We could almost call French restaurants the culinary consulates of France in New York!

My personal experience at Atout France

My experience at Atout France USA was very valuable as I learned about company culture, the tourism industry and about the various software used by the company.

My experience of the company culture and workplace at Atout France USA is very positive. As an intern I have been well received and helped in the beginning of my internship. However, I realized very early on that in order to be useful it was important to be proactive. I cannot emphasize enough on the word ‘proactive’ because it is central to understanding how to be a useful coworker in the trade and events department of the company. I learned that it is important to ask questions about tasks, especially that you could be unfamiliar with as an intern. For example, when building the slide show for an internal proposition I made, I went in a freestyle but learned afterwards that there was a corporate template that was essential to respect in order to keep things more organized.

The tourism industry was a completely new industry for me as I have never interned or leaned towards a career in this sector before. What attracted me the most for this internship was to learn more about the industry, have the opportunity to work in New York and serve the nation of France. Throughout my internship I learned about jobs and vocabulary that I was unfamiliar with before such as what travel writers do, what is MICE (which is an acronym for business tourism), or what is eco-tourism. My time in the industry allowed me also to learn about the importance of networking events for professionals and their ways of communicating. Overall, my experience at Atout France encouraged me to learn more about the different forms of tourism and how professionals operate.

The large number of valuable contacts (from the United States and from France) that Atout France possesses is a key asset that adds value for the local and French companies interested in developing businesses. In order to organize its contacts, Atout France uses a Customer Relation Management tool (CRM) called HubSpot. HubSpot is a cloud-based software platform that provides marketing, sales, and customer service tools for businesses. In the case of Atout France, the main purpose is to store data about its contacts. Data about area, domain of expertise and level of engagement with the company are useful for selectively picking the most adequate contacts when organizing events. For example, amongst the tour operator companies of the network, only a segment of them is already selling French packaged trips. This segment of tour operators is interesting for French companies because they already have an interest in the country and are more likely to create more deals or tailor new offers. Throughout my internship I was taught to get accustomed with the use of the software for searching information, creating spreadsheets for business analytics and creating invite lists for events.

Core missions and duties

Event planning

Part of my responsibilities as an intern at Atout France USA were to contribute to organizing events by finding venues, inviting business representatives and communicating with our clients to best build the event according to their needs. Atout France USA organizes events for its local partners and French institutions to increase their visibility on the American market and meet travel professionals that could be interested in doing business with them. Generally, the size of events ranges from dinners with 10 guests to larger events going over 100 guests. As an intern it was my duty to look for appropriate venues matching the style, theme, and logistical capability of the venue according to the needs of the client.

Market research

As part of my duties as an intern I was asked to perform market research for various missions notably to contribute to the updating of the market presentation of the United States created and regularly updated by Atout France. Atout France puts an emphasis on design and credibility of sources when gathering data. Performing such research is very enriching as it allows you to have a better understanding of the industry and analyze the industry better.

Must do tasks – Mindset

When preparing an event, there were many manual tasks that needed to be done. For example, it was imperative to set up the event space with a well-thought decor, and other necessary equipment. When preparing for the event it also involved managing vendors by making sure they delivered food, beverages, audio-visual equipment, or other services. During events interns were often asked to handle registration and troubleshooting during the event by handling any issues that arise, such as technical difficulties or unexpected changes to the schedule.

Required skills and knowledge

To perform well as an intern at Atout France in New York, there are several prerequisites that you should consider such as strong communication skills. Interns are asked to communicate with different stakeholders, including industry professionals, tourists, and colleagues. Therefore, having the ability to clearly communicate and proactively ask questions is a must. Knowledge of the French language is an excellent plus for talking to partners. It can ease communication and make it easier for both French and American partners. Familiarity with the events and tourism industry is largely valued by Atout France as it is a good indicator for adaptability. Atout France has a dynamic workplace, and as an intern, you may have to manage multiple tasks simultaneously so having good time management and a sense of organization can come in very handy.

Learned skills and knowledge

During my internship I have improved and worked on my hard skills and soft skills. Hard skills such as my knowledge of the industry, learned how to use HubSpot, perform market research in the tourism industry. Soft skills such as flexibility during events, bilingual communication and team empathy skills.

Key concepts

Cultural awareness

Cultural awareness is the ability to recognize and appreciate different cultures, values, and beliefs. It involves understanding and respecting differences between cultures and being able to navigate and communicate effectively with people from different backgrounds. Cultural awareness also involves recognizing one’s own biases and assumptions and being open to learning from and about different cultures. Cultural awareness involves developing attitudes of respect, openness, and curiosity toward other cultures, which can help to build stronger relationships and promote mutual understanding. When performing missions it is important to take into account the image that Americans have of France.

Customer Relationship Management (CRM)

Customer Relationship Management (CRM) tool is a tool that organizations use to manage and analyze their interactions with customers and improve customer relationships. CRM involves collecting and analyzing customer data from various sources, including sales, marketing, and customer service, to gain insights into customer behavior, preferences, and needs. The CRM was a very useful tool for analyzing email opening rates, network contracting and marketing data.

Ecotourism

Ecotourism is a type of tourism that focuses on responsible travel to natural areas that conserve the environment and improve the welfare of local communities. Ecotourism examples are visiting and experiencing natural areas, such as national parks, wildlife reserves, and cultural sites, while minimizing the negative impact on the environment and supporting local communities. Ecotourism is also characterized by responsible travel practices, such as reducing waste, etc.

Ecotourism is of growing interest to France in its pioneering mission of the eco touristic industry and carbon neutral objectives for 2030. At the same time ecotourism can provide economic benefits to the local community by promoting conservation efforts by providing financial incentives for protecting natural resources and wildlife.

MICE

MICE is an acronym that stands for Meetings, Incentives, Conferences, and Exhibitions. It refers to a type of tourism that involves the organization and hosting of business events, such as conferences, seminars, trade shows, exhibitions, and meetings. MICE tourism is a growing industry that often involves large groups of people traveling to a specific destination for a specific purpose, such as attending a conference or meeting.

MICE tourism is of interest to Atout France as it provides significant economic benefits such as revenue for French hotels, restaurants, transportation providers, and other businesses.

Travel Agent VS Tour Operator

A travel agent is an intermediary that personally helps clients plan and book their travel arrangements. On the other hand, a tour operator specializes in organizing and selling complete travel packages, which may include transportation, accommodations, meals, and activities. Both professions are both of interest to Atout France as a majority of Americans use their services to plan their travel to Europe.

B2B and B2C

B2B and B2C are abbreviations for “Business to Business” and “Business to Consumer” respectively. Indeed, different companies rely on different business models. Relations and commerce with different customers change the way companies do business. At Atout France, the company’s services are for companies, so it operates on a B2B model when organizing events. However, Atout France also interacts with the public through marketing campaigns. Whether that interaction is a B2C is arguable because the “product” sold by Atout France is the whole nation of France and the operation is made in the nation’s interest rather than in the businesses’ interest as the income gained from such an operation is not directly earned from the consumer.

Why should you be interested in this post?

My article about my experience as an intern for Atout France in New York should be of great interest to people who are interested in the travel and tourism industry, as well as those who are considering pursuing an internship or career in this field. The article provides valuable insights into what it’s like to work for a destination marketing organization and gives a behind-the-scenes look at the operations of Atout France in New York. Readers can learn about the different departments and functions within a tourism development agency, as well as the challenges and opportunities that come with working in this field. Readers can also learn about the vocabulary, skills and qualities that are important to excel in this industry.

Word of conclusion

In conclusion, my experience as an intern at Atout France in New York was an incredibly valuable opportunity for me. I had the chance to work with a talented and dedicated team, passionate about promoting France as a premier travel destination.

During my internship, I gained valuable insights into the operations of the government in the tourism area abroad and learned about the different strategies and tactics used to promote tourism. I had the chance to work on a variety of projects, from developing marketing materials to conducting research and analysis on industry trends.
Throughout my internship, I was impressed by the level of professionalism and expertise demonstrated by the Atout France team. I also had the chance to network with industry professionals and attend industry events, which provided me with valuable connections and insights into the travel industry.

Overall, my internship at Atout France in New York was an incredible learning experience and a valuable steppingstone in my career. It has provided me with a strong foundation in destination marketing and tourism. I would highly recommend an internship with Atout France to anyone who is passionate about travel and tourism and looking to gain valuable insights and experiences in this industry.

Useful resources

Atout France Organization website

Atout France USA LinkedIn group

HubSpot Firm website

About the author

Article written in March 2023 by William LONGIN (EDHEC Business School, Global BBA, 2020-2024).

Difference between a merger and an acquisition

March 20, 2023 by Prof. François LONGIN

One of my colleagues at ESSEC Business School, Rick MARCHESE, is teaching the Mergers and Acquisitions (M&A) course in the Master in Finance on Singapore campus.

He was asked at the beginning of the course what the difference was between a merger and an acquisition.

His answer was: “If you are the buyer, it’s an acquisition. If you are the target, it’s a merger.”

With the recent events in the financial sector, he recently had a great illustration for his definition from two very credible sources…

Press release by UBS
UBS Press release
Source: UBS.

and

Press release by Credit Suisse
UBS Press release
Source: Credit Suisse.

The business of financial indexes

March 18, 2023 by Nithisha CHALLA

The business of financial indexes

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023) explains the business of financial indexes.

Introduction

Indexes are frequently used in the financial sector to measure the evolution of market prices for a set of financial assets over time. These sets of assets can be defined to represent an asset class, country or geographical zone, or sector of the economy, and provide a comprehensive and accurate overview of the market.

Financial indexes serve as a benchmark for assessing the performance of an investor’s asset portfolio and give investors a way to monitor the performance of a given set of assets. By using financial indexes, investors can gain knowledge of market trends and conditions and make informed investment decisions. Index providers are responsible for creating and maintaining financial indexes.

Financial indexes can be developed to track particular geographical areas or market segments and can be created for a variety of asset classes, including equities, bonds, commodities, and currencies. Financial indexes are primarily provided by specialized companies with experience in data compilation and index value calculation, such as S&P Dow Jones Indices, MSCI, and FTSE Russell. Overall, the business of financial indexes is a critical component of the financial industry, providing valuable data and insights to investors.

Key Players

Index providers

An index provider is a specialized business that specializes in developing and computing market indices as well as licensing its intellectual property to be used as the foundation of passive products. The index providers are essential to the investment professionals in charge of looking after these assets because they provide reliable data distribution, sound index construction, and strict index maintenance. The primary activities of an index provider are product development, licensing, distribution, and related service and support.

Index Industry Association (IIA)

The production of indexes has become an industry! And every industry has a professional association. The index industry is no exception. The Index Industry Association (IIA) was founded in 2012. Some of the founding members are MSCI and S&P Dow Jones Indexes.

As stated on the IIA website, the association mandate is “to educate investors on the attributes and role of indexes within the investment process, to advocate for the interests of index users and providers worldwide, and to push for industry standards of best practice, independence and transparency”.

Business models

Index providers typically employ one of the following business models to make money from their indexes: licensing, creating index-linked products, getting charged for index inclusion, and selling data for index-related research and analysis.

Licensing

Index providers make money by licensing financial institutions like asset managers, banks, and insurance companies to use their indexes. These financial institutions pay a fee to the index provider for the right to use the indexes as a benchmark for their investment products, such as exchange-traded funds (ETFs) and index funds.

Creation of index-linked products

Index providers make money by developing their own index-linked products, such as index funds and ETFs. The investors that are invested in the product pay a management fee to the index provider.

Selling data

By selling the data that has been produced from the history, research, and analysis, the index providers make money.

Regulation of indexes

Index providers build and maintain indexes. In order to ensure that the index accurately reflects the performance of the market or sector it is meant to represent, they are in charge of defining the methodology used to construct the index, choosing the stocks or bonds included in the index, and performing routine index rebalancing.

Beyond the activity of index providers, financial authorities play a role to authorize indexes. The main objective of authorization is to safeguard investors who use the index as a benchmark for their investment decisions and to make sure that the index accurately reflects the performance of the market or sector it is meant to represent. In the United States, the US Securities and Exchange Commission (SEC) has the power to approve specific indexes that serve as the foundation for exchange-traded funds (ETFs) and other investment products. This is done to make sure that these products operate in the best interests of investors and are compliant with SEC regulations.

Why should I be interested in this post?

A wide range of professionals, including portfolio managers, investment advisors, and financial analysts, use financial indexes, which are a crucial part of the financial sector. Financial indexes change over time to take into account adjustments to the economy and market conditions.

You can stay on top of the curve and adjust to changes in the industry by staying informed of the most recent financial index developments. So, in my opinion, studying the business of financial indexes can give business students useful skills and knowledge that they can use in a variety of fields and jobs.

Useful resources

Index Industry Association (IIA)

S&P Global Who’s Behind the Index?

Committee for Economic Development of The Conference Board (CED) The Financial Index Industry

K&L Gates SEC solicits comments on whether index providers, model portfolio providers, and pricing services are investment advisers: seeking a problem for a “solution”

About the author

The article was written in March 2023 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023).

The S&P 500 index

January 17, 2025March 18, 2023 by Nithisha CHALLA

The S&P 500 index

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023) presents the S&P 500 index and details its characteristics.

The S&P 500 index

The performance of 500 major capital companies listed on the US stock exchange is summarized by a financial index called the S&P 500 index. The stocks of the S&P 500 index are traded on the New York Stock Exchange and NASDAQ, which are the two major stock exchanges in the United States of America. This index serves as a benchmark for the American stock market and investors use it to monitor the performance of the market. The selection of 500 stocks only is deemed enough to represent the stock market (in terms of market capitalization).

The S&P 500 index was first established by Standard & Poor’s, a provider of financial services, on March 4, 1957. In order to provide a comprehensive assessment of the U.S. stock market, the index consists of a range of large-capital businesses from various industries and sectors. The S&P 500 index is currently managed by the index provider S&P Dow Jones Indices (a division of S&P Global).

Who makes the shortlist of the index and how the field is narrowed down? The S&P Dow Jones Indices oversees the selection procedure for index inclusion. The public float, financial viability, market capitalization, and a diverse representation of the US stock market—including technology, healthcare, financials, consumer goods, etc.—are some of the key criteria used to define the composition of the index.

How is the S&P 500 index represented in trading platforms and financial websites? The ticker symbol used in the financial industry for the S&P 500 index is “SPX”.

Table 1 gives the Top 10 stocks in the S&P 500 index in terms of market capitalization as of January 31, 2023.

Table 1. Top 10 stocks in the S&P 500 index.

Source: computation by the author (data: YahooFinance! financial website).

Table 2 gives the sector representation of the S&P 500 index in terms of number of stocks and market capitalization as of January 31, 2023.

Table 2. Sector representation in the S&P 500 index.

Source: computation by the author (data: YahooFinance! financial website).

Calculation of the S&P 500 index value

The S&P 500 index is a value-weighted index (also called a market-capitalization- weighted index). This means the larger companies have a greater impact on the index than the smaller companies.

At the end of each trading day the value of the S&P 500 index is determined in real-time and can be used as a benchmark for the performance of the index’s constituent companies’ current market prices.

The formula to compute the S&P 500 index is given by

SP500 Index value

where I is the index value, k a given asset, K the number of assets in the index, P^k the market price of asset k, N^k the number of issued shares for asset k, and t the time of calculation of the index.

In a S&P 500 index, the weight of asset k is given by formula can be rewritten as

SP500 Index Weight

which clearly shows that the weight of each asset in the index is its market capitalization of the asset divided by the sum of the market capitalizations of all assets.

The divisor, whose calculation is based on the number of shares, is typically adjusted for events such as stock splits and dividends. The divisor is used to ensure that the value of the index remains consistent over time despite changes in the number of outstanding shares.

Note that there are two versions of the S&P 500 index: one which includes the performance of the company as well as the dividends the companies pay (so it is a dividend included index), and another one which only considers the performance of the company but does not consider the dividends.

Use of the S&P 500 index in asset management

Given that the index is used for performance measuring it is widely used for constructing and analyzing investment portfolios. This index’s primary use is to create investment strategies, mitigate risk, and assess portfolio performance. Investors and asset managers utilize this index as an useful index to measure the overall performance of the market.

Benchmark for equity funds

There are a number of indices used as a benchmark for equity funds but the S&P 500 index particularly focuses on the large capped companies in the US market. It is mainly differentiated by the asset class the index is focusing on and the investment strategies followed by the companies. For Example: DJIA uses price weighted stock strategy for the top 30 blue chip companies, whereas the NASDAQ Composite Index uses market capitalization-weighted index of more than 3,000 stocks in the NASDAQ Composite.

Financial products around the S&P 500 index

There are a number of financial products that either provide exposure to the index or use information from the index. Not just the index funds but there are numerous ETFs and specific sector related indices which provide exposure to the S&P 500 index. Other financial products would be mutual funds, futures and options etc.

Historical data for the S&P 500 index

How to get the data?

The S&P 500 index is the most common index used in finance, and historical data for the S&P 500 index can be easily downloaded from the internet.

For example, you can download historical data for the S&P 500 index from December 30, 1927 on Yahoo! Finance (the Yahoo! code for S&P 500 index is ^GSPC).

Source: Yahoo! Finance.

You can also download the same data from a Bloomberg terminal.

R program

The R program below written by Shengyu ZHENG allows you to download the data from Yahoo! Finance website and to compute summary statistics and risk measures about the S&P 500 index.

Data file

The R program that you can download above allows you to download the data for the S&P 500 index from the Yahoo! Finance website. The database starts on December 30, 1927. It also computes the returns (logarithmic returns) from closing prices.

Table 3 below represents the top of the data file for the S&P 500 index downloaded from the Yahoo! Finance website with the R program.

Table 3. Top of the data file for the S&P 500 index.
Top of the file for the S&P 500 index data
Source: computation by the author (data: Yahoo! Finance website).

Summary statistics for the S&P 500 index

The R program that you can download above also allows you to compute summary statistics about the returns of the S&P 500 index.

Table 4 below presents the following summary statistics estimated for the S&P 500 index:

The mean
The standard deviation (the squared root of the variance)
The skewness
The kurtosis.

The mean, the standard deviation / variance, the skewness, and the kurtosis refer to the first, second, third and fourth moments of statistical distribution of returns respectively.

Table 4. Summary statistics for the S&P 500 index.

Source: computation by the author (data: Yahoo! Finance website).

Evolution of the S&P 500 index

Figure 1 below gives the evolution of the S&P 500 index from December 30, 1927 to December 30, 2022 on a daily basis.

Figure 1. Evolution of the S&P 500 index.

Source: computation by the author (data: Yahoo! Finance website).

Figure 2 below gives the evolution of the S&P 500 index returns from December 30, 1927 to December 30, 2022 on a daily basis.

Figure 2. Evolution of the S&P 500 index returns.

Source: computation by the author (data: Yahoo! Finance website).

Statistical distribution of the S&P 500 index returns

Historical distribution

Figure 3 represents the historical distribution of the S&P 500 index daily returns for the period from December 30, 1927 to December 30, 2022.

Figure 3. Historical distribution of the S&P 500 index returns.

Source: computation by the author (data: Yahoo! Finance website).

Gaussian distribution

The Gaussian distribution (also called the normal distribution) is a parametric distribution with two parameters: the mean and the standard deviation of returns. We estimated these two parameters over the period from December 30, 1927 to December 30, 2022. The mean of daily returns is equal to 0.02% and the standard deviation of daily returns is equal to 1.20% (or equivalently 5.88% for the annual mean and 19.38% for the annual standard deviation as shown in Table 3 above).

Figure 4 below represents the Gaussian distribution of the S&P 500 index daily returns with parameters estimated over the period from December 30, 1927 to December 30, 2022.

Figure 4. Gaussian distribution of the S&P 500 index returns.
Gaussian distribution of the daily S&P 500 index returns
Source: computation by the author (data: Yahoo! Finance website).

Risk measures of the S&P 500 index returns

The R program that you can download above also allows you to compute risk measures about the returns of the S&P 500 index.

Table 5 below presents the following risk measures estimated for the S&P 500 index:

The long-term volatility (the unconditional standard deviation estimated over the entire period)
The short-term volatility (the standard deviation estimated over the last three months)
The Value at Risk (VaR) for the left tail (the 5% quantile of the historical distribution)
The Value at Risk (VaR) for the right tail (the 95% quantile of the historical distribution)
The Expected Shortfall (ES) for the left tail (the average loss over the 5% quantile of the historical distribution)
The Expected Shortfall (ES) for the right tail (the average loss over the 95% quantile of the historical distribution)
The Stress Value (SV) for the left tail (the 1% quantile of the tail distribution estimated with a Generalized Pareto distribution)
The Stress Value (SV) for the right tail (the 99% quantile of the tail distribution estimated with a Generalized Pareto distribution)

Table 5. Risk measures for the S&P 500 index.

Source: computation by the author (data: Yahoo! Finance website).

The volatility is a global measure of risk as it considers all the returns. The Value at Risk (VaR), Expected Shortfall (ES) and Stress Value (SV) are local measures of risk as they focus on the tails of the distribution. The study of the left tail is relevant for an investor holding a long position in the S&P 500 index while the study of the right tail is relevant for an investor holding a short position in the S&P 500 index.

Why should I be interested in this post?

For a number of reasons, ESSEC students should learn about the S&P 500 index. The performance of 500 large-cap American companies is tracked by this stock market index, which is first and foremost well-known and respected. Gaining a deeper understanding of the US stock market and the businesses that fuel its expansion requires knowledge of the S&P 500 index. Management students can assess the performance of their own investments and those of their organization by comprehending the S&P 500 index and its components. Last but not least, a lot of businesses base their mutual funds and exchange-traded funds (ETFs) on the S&P 500 index.

Useful resources

Academic research about risk

Longin F. (2000) From VaR to stress testing: the extreme value approach Journal of Banking and Finance, N°24, pp 1097-1130.

Longin F. (2016) Extreme events in finance: a handbook of extreme value theory and its applications Wiley Editions.

Data: Yahoo! Finance

Yahoo! Finance

Yahoo! Finance Historical data for the S&P 500 index

Data: Bloomberg

Bloomberg

Bloomberg Data for the S&P 500 index

About the author

The article was written in March 2023 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023).

Calculation of financial indexes

March 18, 2023 by Nithisha CHALLA

Calculation of financial indexes

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023) explains the calculation of financial indexes.

Introduction

A stock market index keeps tabs on the gains and losses made by a specific selection of stocks or other assets. In other words, the index determines how share prices for various companies have changed. The performance of a market index can be quickly evaluated to ascertain the state of the stock market. It also serves as a template for financial institutions to use when creating index funds and exchange-traded funds (ETFs).

Definition

What is an index? In financial markets, there are many sectors, segments and business lines, and if you have to statistically measure the performance of these sectors we need a reference which is called an index. Simply, it is a group of securities or financial instruments which represents the performance of a specific segment of the market.

Calculation

Then the index value has to be calculated with a specific formula. There are different calculation methods for financial indexes: price-weighted index, market-capitalization-weighted index, equal-weighted index and fundamentals-weighted index.

The general formula for a financial index is given by

Index value

where I is the index value, P the asset market price, k a given asset, K the number of assets in the index, w^k the weight of asset k in the index, and t is the time of calculation of the index.

Note: the index I_t at time t is divided by the value of the index at the beginning I₀ and multiplied by 100.

Price-Weighted Index

A price-weighted index is calculated by summing the prices of all the assets in the index and dividing by a divisor equal to the number of assets.

The formula for a price-weighted index is given by

Price Weighted Index value

where I is the index value, k a given asset, K the number of assets in the index, P^k the market price of asset k, and t the time of calculation of the index.

In a price-weighted index, the weight of asset k is given by formula can be rewritten as

Price Weighted Index Weight

which clearly shows that the weight of each asset in the index is its market price divided by the sum of the market prices of all assets.

Index value

where D is the divisor which is adjusted over time to account for events such as stock splits and dividends.

In a price-weighted index, the higher-priced stocks move the index more than the lower-priced stocks.

The most popular price-weighted index in the world is likely the Dow Jones Industrial Average (DJIA). It consists of 30 different stocks in the US market.

Market-Capitalization-Weighted Index

The formula for a market-capitalization-weighted index is given by

Market Capitalization Index value

In a market capitalization-weighted index, the weight of asset k is given by formula can be rewritten as

Market Capitalization Weighted Index Weight

which clearly shows that the weight of each asset in the index is its market capitalization of the asset divided by the sum of the market capitalizations of all assets.

Float-adjusted market-capitalization-weighted index

The formula for a float-adjusted market-capitalization-weighted index is given by

Float Adjusted Market Capitalization Index value

where I is the index value, k a given asset, K the number of assets in the index, P^k the market price of asset k, N^k the number of issued shares for asset k, F^k the float factor of asset k, and t the time of calculation of the index.

In a float-adjusted market-capitalization-weighted index, the weight of asset k is given by formula can be rewritten as

Float Adjusted Market Capitalization Weighted Index Weight

Fundamental-weighted Index

A fundamental-weighted index is calculated based on specific financial metrics, such as revenue or earnings, rather than market capitalization or price. The weightings of each asset in the index are determined by its financial metrics, so that the companies with the strongest financial performance have the greatest impact on the overall performance of the index.

The formula for a fundamental-weighted index is given by

Fundamental Weighted Index value

where I is the index value, k a given asset, K the number of assets in the index, P^k the market price of asset k, F^k the financial metric of asset k, and t the time of calculation of the index.

In a fundamental-weighted index, the weight of asset k is given by formula can be rewritten as

Fundamental Weighted Index Weight

which clearly shows that the weight of each asset in the index is the value of the fundamental variable of the asset divided by the sum of the values of the fundamental variable of all assets.

Equal-weighted Index

An equal-weighted index is calculated by dividing the total value of the index by the number of securities in the index, and then allocating the same weighting to each security. This method gives each security an equal influence on the overall performance of the index, regardless of its market capitalization.

The formula for an equal-weighted index is given by

Equal Weighted Index value

In an equal-weighted index, the weight of asset k is given by formula can be rewritten as

Equal Weighted Index Weight

Which clearly shows that the weight of each asset in the index, one divided by the number of assets, is constant over time.

Examples of financial indexes

The Dow Jones Industrial Average: an equal-weighted index

The Dow Jones Industrial Average, or DJIA (Dow), was the first index, appearing in 1896. The 30 largest and most prosperous American companies make up the Dow. The experts have carefully chosen these businesses to represent a wide range of industries. Companies with higher prices are given more weight in the Dow. Even though it is the most established and performs similarly to the S&P 500, it is occasionally thought to be less indicative of the entire market.

The S&P 500 index: a market-capitalization-weighted index

S&P 500 – The performance of 500 of the biggest American publicly traded companies is measured. Some people think the S&P 500, which is weighted by market capitalization and has a wider scope, is the best indicator of the American stock market. Because of this, the S&P 500’s average is most significantly impacted by the companies with the highest total market value.

Why should I be interested in this post?

Learning about the calculation of financial indices is important to understand the behavior of an index. It can assist you in managing risk in your portfolio, understanding the overall performance of various markets, and making wise investment decisions. Financial indices can offer insightful data on how various markets, sectors, and economies are performing. Investors can determine whether their investments are outperforming or underperforming the overall market by comparing the returns to the returns of a relevant financial index.

Useful resources

Weight priced index Indice

Equity Indexes Indice

Security market index Indice

Value weighted index Indice

Evolution of indexes Indice

About the author

The article was written in March 2023 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023).

Financial indexes

March 18, 2023 by Nithisha CHALLA

Financial indexes

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023) explains financial indexes, their construction and their use in the finance.

Definition

What is an index? An index can be defined as a measure of a quantity.

An index is a measure of quantity that can be defined as the ratio between the value of the quantity during a current period and its value during a base period. The use of a ration makes it easy to calculate and compare changes in one or more quantities between two given periods. This ratio is often multiplied by 100 or 1,000. Indexes are frequently used in the financial sector to measure the evolution of market prices for a set of financial assets over time. These sets of assets can be defined to represent an asset class, country or geographical zone, or sector of the economy, and provide a comprehensive and accurate overview of the market.

History

The Dow Jones Industrial Average was first created in 1896 by Charles Dow, a co-founder of the Dow Jones Company, and is widely regarded as the first index. Who is creating the index? The Dow Jones Industrial Average, which included 12 companies at the time that were emblematic of the US Market. Currently, there are 30 companies that make it up even though none of the original 12 companies are still included. As interest in indices increased, financial publications like the Financial Times or exchange owners like the Deutsche Borse in Germany developed their own equity indices, while investment banks took the lead in developing indices for bonds. Since then, numerous other financial indexes have been developed, including the NASDAQ Composite, FTSE 100, Nikkei 225, S&P 500, and others.

Evolution over time

Stock market indexes were initially just simple arithmetic averages of the prices of a small number of chosen stocks; they did not take the entire market into account. The daily averages were first published in the newspapers in the 1800s. Later, they began to use market capitalization weighting, which was well-liked because it assigned weights based on the size of the company. Following that, various indexes based on sectors, nationalities, etc. were assigned. A significant trend recently has been the use of passive index funds and the addition of ESG criteria to the indexes.

Providers of financial indexes

Financial indexes are typically provided by financial data and research firms. As mentioned earlier, though there are several providers in the financial services industry, there are few most prominent index providers – S&P Global, MSCI, FTSE Russell, Dow Jones Indices and Nasdaq. With a combined market share of about 90% for equity indexes, these firms are thought to dominate the world index market.

Index Industry Association (IIA)

The production of indexes has become an industry! And every industry has a professional association. The index industry is no exception. The Index Industry Association was founded in 2012. Some of the founding members are MSCI and S&P Dow Jones Indexes.

Composition of an index

The composition of an index is a crucial factor in determining its representation, and it is important for investors to understand the criteria used by the index provider to select the assets included in the index, as well as the weightings assigned to each asset. The composition of an index is designed to represent a specific market or sector, and the index provider selects the assets to be included based on specific criteria, such as market capitalization, liquidity (float), and sector representation.

There are several steps in the process of creating an index. As we all know, index providers use a variety of companies to create the index, but how are they selected? Specific eligibility requirements must be met, such as the size of the business and the industry it belongs to, etc. After the eligible companies have been narrowed down, they are properly evaluated before being included in the index. This evaluation includes looking at the company’s earnings, market capitalization, and other factors. Additionally, they conduct index balancing with regard to various industries, segments, etc. Last but not least the index’s potential market impact is cross-checked as the index stands as a benchmark for the investors to make decisions. Different index providers may have different selection criteria and processes.

The index provider regularly reviews and updates the composition of the index to ensure that it remains representative of the market or sector it is tracking.

For example, the S&P 500 index is designed to represent the performance of the U.S. stock market, and the securities included in the index are chosen based on market capitalization, liquidity, and sector representation. Since each security’s weight in the index is based on its market capitalization, the largest and most powerful corporations have the biggest effects on the index’s overall performance.

Calculation of financial indexes

Once the index provider has chosen the assets to be included in the index based on predetermined criteria, such as market capitalization, liquidity, and sector representation. Then the index value has to be calculated with a specific formula. There are different calculation methods for financial indexes: price-weighted index, market-capitalization-weighted index, equal-weighted index and fundamentals-weighted index.

Classifications of financial indexes

By having a solid understanding of the various classifications of financial indexes, investors can select the most suitable indexes for their investment goals and strategies. Market coverage, calculation method, geographic region, asset class, investment approach, and security type are used to categorize financial indexes.

The criteria for classifying financial indexes include:

Asset class: equity, bond, crypto, etc.
Geography: US, Asia-Pacific, Europe
Sector: Information Technology, Health Care, Financials, Consumer Discretionary, Communication Services, Industrials, Consumer Staples, Energy, Utilities, Real Estate, and Materials.
Weighting methodology: price-weighted, market-capitalization-weighted, float-adjusted market-capitalization-weighted, fundamental-weighted
Objectives: market representation, risk factor representation

Most popular financial indexes

The Dow Jones Industrial Average

The Dow Jones Industrial Average (DJIA) was established in 1896, is the country’s first stock market index. Thirty large-cap companies that are leaders in their fields are included in this price-weighted index. The index is frequently used as a gauge for the American stock market and the overall economy. ▶ More about the DJIA index

S&P 500

The S&P 500 index is a market capitalization-weighted index that monitors the progress of 500 large-cap U.S. businesses operating in various industries. It was established in 1957, and many people consider it to be one of the most significant benchmarks for the American stock market. The index is widely used as a benchmark by fund managers and investors and is frequently used as a stand-in for the overall health of the American economy. ▶ More about the S&P 500 index

Nasdaq Composite

Composed of all the companies listed on the Nasdaq stock market, the Nasdaq Composite is a market capitalization-weighted index. It was founded in 1971 and is renowned for the prominence of technology firms, even though it also includes businesses from the consumer goods, healthcare, and finance sectors. The index is frequently used as a yardstick for growth and technology stock performance. ▶ More about the Nasdaq Composite index

FTSE 100

The performance of the top 100 companies listed on the London Stock Exchange is tracked by the FTSE 100, a market capitalization-weighted index. Since its creation in 1984, it has gained widespread recognition as the top benchmark for the UK stock market. Companies from the financial, energy, and mining sectors make up the majority of the index, and each company is weighted according to its market capitalization. ▶ More about the FTSE 100 index

MSCI World

The MSCI World Index tracks the performance of businesses in 23 developed markets around the world, including the United States, Canada, Japan, and Europe. It is a market capitalization-weighted index. It was developed in 1969 and is frequently used as a yardstick for performance in the global equity market. The weighting of each company in the index, which consists of more than 1,600 large- and mid-cap stocks, is determined by its market capitalization.

Health Care Select Sector Index

The Health Care Select Sector Index is based on the companies of the S&P 500’s health care sector. It was established in 1998 with the purpose of monitoring the performance of businesses involved in the health care sector, such as those producing pharmaceuticals, biotechnology, medical devices, and healthcare providers.

Use of indexes in finance

Financial indexes play an important role for market participants like investors, traders, and asset managers. Some of the ways indexes are used in finance include:

Gauges of the market evolution

Indexes can offer insightful information about the state of the financial markets. An index helps to measure the market returns of a given set of securities.

The best part of the stock index is that just by tracking the simple indicator we get a general idea of how the stock market is performing. A stock index clearly shows how the market is performing, or at least the market that it represents, despite the fact that individual stocks may perform differently, making it challenging to determine whether the market is strong or weak.

Benchmarks

Indexes are frequently used as a benchmark to assess the performance of investment portfolios, especially actively managed portfolios.

Proxies for modeling

In academic studies, indexes are used as proxies for the market portfolio to capture systematic risk and to compute risk-adjusted performance.

Portfolio Asset allocation

Because they offer a way to gain exposure to particular asset classes, industries, or geographic areas, indices serve as the foundation for asset allocation strategies.

Risk management

Indexes can assist investors in comprehending the risks related to particular asset classes or geographical areas.

Building of investment vehicles

Exchange-traded funds (ETFs), mutual funds, options and structured products, among others, use indexes as their underlying assets. These investment vehicles make it easy and affordable for investors to become exposed to the index’s performance.

Rebalancing

Some indexes imply frequent and even continuous rebalancing (buying and selling assets). For example, for a fund tracking an equally-weighted index, the fund manager will have to sell assets whose price increased and buy assets whose price decreased.

Change in index composition and impact on asset prices

When an asset is included in an index, its price usually increases as fund managers need to buy it to include it in their portfolio. Conversely, when an asset is excluded from an index, its price usually decreases as fund managers need to sell it to exclude it from their portfolio.

Empirical results confirming these propositions can be found in a study by McKinsey (2004). The prices of the assets included in a financial index may change as a result of changes in the composition of the index over time.

It is crucial to remember that depending on the specifics of the change, the effect of a change in index composition on asset prices may be either short-lived or long-lasting. The effect of a change in index composition on asset prices can also be challenging to forecast because it depends on a variety of variables, such as investor sentiment, fund flows, and market sentiment.

Link with academic research

The performance of a particular sector of the stock market, such as large-cap stocks, small-cap stocks, or a specific sector or industry, is measured by an equity index, a type of financial index.

On the other hand, market factors are factors that account for a significant amount of the variation in stock prices. Market variables include both macroeconomic ones like interest rates and GDP and market-specific ones like market volatility and liquidity.

The relationship between equity indexes and market factors is that changes in market factors can have an impact on equity index performance, and equity index performance can be influenced by market factor changes. For instance, adjustments in interest rates may have an effect on the performance of the stock market as a whole and, consequently, on the performance of an equity index that monitors the stock market. Factor-based indexes that seek to capture the performance of particular market factors, such as value, growth, and momentum, have been developed as a result of research into the effects of market factors on equity indexes. These factor-based indexes can be employed to examine the effects of market factors on the performance of equity indexes and to base investment choices on the exposure to market factors.

Why should I be interested in this post?

I frequently come across news-related stocks, bonds, and indices in publications like newspapers, financial journals, and business magazines. We require a fundamental understanding of indices in order to even understand what is happening in the business world. It’s also crucial to have a thorough understanding of markets and financial indices because we need to comprehend these financial indices in order to assess a company’s performance and compare it to previous years.

Useful resources

Insee Indice

Russel How are indexes weighted?

Financial Index Industry Presentation of the association

Index Industry Association Presentation of the association

Marc H. Goedhart and Regis Huc (2004) What is stock index membership worth? McKinsey & Company.

About the author

The article was written in March 2023 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023).

Good-til-Cancelled (GTC) order and Immediate-or-Cancel (IOC) order

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What is Immediate-or-Cancel (IOC) Order?

Significance

What is the difference between Good-til-Cancelled (GTC) Order and Day order

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The NASDAQ index

The NASDAQ index

Calculation of the NASDAQ index value

Use of the NASDAQ index in asset management

Benchmark for equity funds

Financial products around the NASDAQ index

Historical data for the NASDAQ index

How to get the data?

R program

Data file

Summary statistics for the Nasdaq index

Evolution of the Nasdaq index

Statistical distribution of the Nasdaq index returns

Historical distribution

Gaussian distribution

Risk measures of the Nasdaq index returns

Why should I be interested in this post?

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Academic research about risk

Data: Yahoo! Finance

Data: Bloomberg

About the author

The DJIA index

The DJIA index

Calculation of the DJIA index value

Use the DJIA index in asset management

Benchmark for equity funds

Financial products around the DJIA index

Historical data for the DJIA index

How to get the data?

R program

Data file

Summary statistics for the Dow Jones index

Evolution of the Dow Jones index

Statistical distribution of the Dow Jones index returns

Historical distribution

Gaussian distribution

Risk measures of the Dow Jones index returns

Why should I be interested in this post?

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About financial indexes

About other US financial indexes

About portfolio management

About statistics

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Academic research about risk

Data: Yahoo! Finance

Data: Bloomberg

About the author

Float

What is Float?

Float and IPO

Why is the float important?

High-float stocks and low-float stocks