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Stocks 203: Understanding the News

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1.
Which of the following stock indexes is price-weighted?
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Dow Jones Industrial Average. The Dow is price-weighted. The Nasdaq Composite Index and the SP 500 Index are market-cap-weighted.
2.
The divisor used to calculate the Dow Jones Industrial Average _______.
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Has been shrinking steadily in recent years. The divisor used to calculate the Dow has been shrinking steadily in recent years to account for arbitrary events such as stock splits and changes in the composition of the roster.
3.
Which of the following would most likely affect a company's long-term investment outlook?
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The Securities and Exchange Commission is investigating the company to determine if it fraudulently misstated its financial results for the past several years. A slight earnings miss or analyst downgrade would not explicitly change a company's intrinsic value, and both events are very short-term focused. An SEC investigation into accounting could materially impact the investment outlook, however.
4.
What is an "earnings surprise"?
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When a company's actual earnings results differ from what Wall Street's analysts expect. The actual earnings may be higher or lower. As a result, the company's stock price may rise or fall.
5.
If a news event leads to a drop in a stock's price, what should you as an investor do in response?
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See whether the event is relevant to your stocks. Sometimes the markets' reactions to the headlines are warranted, and sometimes they are not. But are they relevant to your stocks?