If you have ever watched the news on television, it is certain that you will have heard of the FTSE and be aware that it is some sort of measure as to how the stock market in London is performing, or failing to perform. But what exactly is the FTSE and what does the number mean?
The Stock Exchange
Trading in stocks and shares has a history in London which can be traced back for more than three hundred years to the coffee houses of the city. The London Stock Exchange is one of the oldest in the world and remains one of the most important trading hubs globally. Some 3000 companies, drawn from 70 nations, can be traded on the London Stock Exchange and more than 400 businesses (mainly investment banks and stockbrokerage firms) are currently members of the London Stock Exchange. The exchange merged with Borsa Italiana in 2007 to create the leading, diversified exchange business inEurope and is now known as the London Stock Exchange Group.
The Financial Times
The Financial Times is one of the world’s foremost business newspapers and was established in the UK in 1888, but it did not adopt its iconic pink colour until 1893. Its initial focus was to serve the UK business sector, but with increasing multinational ownership of businesses and the rise of the global market, its focus and centres of publication have diversified to reflect the new reality. It first published international company news in 1968. The Financial Times started to publish an index of the thirty leading companies in the UK as early as 1935.
Stock Market Index
The idea of a stock index is that it will provide a weighted average of the performance of the group of companies which make it up. This provides a “barometer” of the economic performance of the sector which can be used to give a snapshot of the performance of the economy; if the index is broad based. This is why the values of various major stock market indices are usually included in the broadcast news programmes. When the Japanese earthquake and tsunami struck on the 11th of March 2011, the economic repercussions sent market indices lower around the world because of the interconnected nature of modern business.
The most famous index of UK business values is undoubtedly the FTSE 100. This index was established in 1984 and contains the UK’s largest 100 companies, judged by market capitalisation (hence FTSE 100). In 1995, the Financial Times and the London Stock Exchange set up a joint venture, the FTSE group which is now responsible for the creation and management of over 120000 equity, bond and alternative asset-class indices around the world. Unsurprisingly, FTSE group has established itself as the world leader in the field of financial indices. FTSE does not provide advice to companies or individuals allowing it to provide objective market information in the shape of its indices. The composition of an index (i.e. inclusion or exclusion of a given corporation or asset) is determined by an independent committee of financial experts, drawn from a range of activities.
Apart from providing an economic snapshot for the general public, the FTSE index is used by a range of financial professionals to assist them with a range of activities including: investment analysis; performance measurement; asset allocation; portfolio hedging; and creation of index tracking funds.
Investing In The FTSE 100
Although it is impossible to invest in the FTSE 100 directly, for the very reason that it is an index and therefore not something that you can purchase, it is possible to invest in a fund which is based on the value of the FTSE. This sort of an investment is referred to a derivative since the value of the fund that you invest in derives its value from companies listed on the index. In principle, funds invested in a “tracker” product are used to buy selected funds from within the FTSE 100 index; then at the end of a specified investment period, the investor is paid on the basis of a proportion of the ratio of the FTSE 100 index at the outset of the investment period to its final value.
Tracker type products need to be carefully examined to see just what proportion of the “upside” gain you would receive and to see how much of your capital is at risk if the index falls over the investment period. There are schemes that guarantee the return of your full investment (less service charges) if the index falls over the lifetime of the investment.
At the moment, the FTSE stands at 5843.66 (15/07/11); at the height of the last major Bull Run, the index peaked at 6950 (30/12/99); at the worst point of the global financial recession, the index stood at just 3512.09 (3/3/09). These figures illustrate the value of an index such as the FTSE 100 in having a snapshot of economic performance in perspective. Obviously, financial professionals use the index to look at shorter and longer term trends as a tool to help them make financial decisions. The index is updated every 15 seconds during the trading day allowing for dynamic decision taking.