The FTSE indices are key barometers for the performance of the highest-capitalized companies on the London Stock Exchange, the largest European stock exchange. Let's find out more about them
Putting things into context – the London Stock Exchange's two different markets
The stock market is the virtual marketplace where people buy and sell shares in publicly traded companies, taking a slice of ownership in those firms.
The primary stock exchange in the UK, London Stock Exchange, operates two markets – the Main Market, where the largest companies list) and the Alternative Investment Market (abbreviated AIM), where smaller-sized companies list.
More than 1000 companies appear listed on the Main Market, totalling a market capitalization of £3.8 trillion (data as of March 2021).
These companies belong to a hugely diverse spectrum of fields, covering an impressive number of different sectors. The market benefits from a high degree of highly regulation, placing strict requirements for companies to adhere to.
The Alternative Investment Market (AIM) includes smaller, growing companies from various sectors. There are close to 1000 companies listed here, with a total market value of over £90 billion as of March 2021.
The FTSE series indices explained
The FTSE series includes a set of indices within the Main Market. These indices fall under the FTSE Russell umbrella, a subsidiary of the London Stock Exchange Group. FTSE stands for Financial Times Stock Exchange - originally part-owned by the London Stock Exchange and the Financial Times.
The different FTSE indices on the Main Market are:
- FTSE 100 (UK100) — the largest 100 companies – known as Footsie.
- FTSE 250 — the 101st to the 350th most significant businesses.
- FTSE 350 – a mix of the FTSE 100 and FTSE 250 companies.
- FTSE SmallCap — the companies allowed into the FTSE group, not large enough to enter the top 350.
- FTSE All-Share— all the companies in the FTSE 100, FTSE 250, and FTSE Small Cap indices.
- FTSE Fledgling – smaller companies listed on the Main Market that cannot qualify for the other indices.
Now let's stop for a moment and talk about FTSE100 (UK100), the most poignant index from the list.
About FTSE 100 (UK100) - a brief history
UK100 launched on January 3rd 1984 at an index level of 1,000 and a total market value of £160 billion - approximately 81% of the market capitalization of the wider LSE.
Since then, the index has undergone numerous changes. Mergers, takeovers and disappearing companies have come and gone, underlining the index's primary purpose of reflecting as a barometer of market activity. FTSE100 gets changed every quarter to make sure it still reflects the top 100 companies.
In 2015, the index surpassed the 7k threshold for the first time – its previous record level being 6,93k, reached during the dot-com boom in December 1999.
How is the UK100 value calculated?
The level of the UK100 is calculated using the total market capitalization of the companies included (and the index value).
Because the individual share prices of the companies affect the total market capitalization, every share price change can inflict index value changes. When the FTSE 100 goes either up or down, the difference is quoted against the previous day's close.
On the evening news, the figure you see is the closing value of the FTSE 100 for that day. The index is calculated continuously every weekday (excluding public holidays), from market opening until market close.
UK100 – impacting factors
You should know the significant factors impacting the price of the FTSE100 to predict the most relevant price changes. These include the strength of the GBP, earnings reports, and interest rate changes.
1. The GBP strength.
Most of the revenue generated by FTSE 100 companies comes from overseas. So, a weaker Pound means British goods are cheaper to buy, potentially boosting exports – and, in turn, elevate the index' price.
2. Earning reports
Earning reports can move stock prices and indices. As the index is weighted, a positive or negative earnings surprise in the most important stocks, for example, can have a meaningful impact on the price of the index as a whole.
3. Interest rate changes
When interest rates rise, equities and indices may fall due to companies facing larger repayments on the debt, resulting in decreased profits.
How the UK100 impact Great Britain's economy… and its people
The UK100 index value impacts most people in the UK. Just think about pension fund holders, whose investments can go into UK equities; how well the index is performing directly affects the return they will receive.
The FTSE 100 is also considered a barometer for economic and international events – it will often drop in response to markets falling around the world.
Sources: thebalance.com, investopedia.com.
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