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What on earth is a FTSE?

Learn how to play FTSE

FTSE All-Share
FTSE 100
FTSE 250

The FTSE ('Footsie'), which originally stood for Financial Times Stock Exchange, is the common name for a set of British stock market indices that show how well companies listed on the London Stock Exchange (LSE)are performing.

The LSE is like a big marketplace where people (and funds) representing all sorts of things, such as your pension fund, come together to buy and sell shares in companies. Remember, when you buy shares in a company you are actually buying a piece of that company - you own a little bit (or, if you're Warren Buffett, a big bit) of that company.

In the old days the market used to involve men coming together and yelling and waving their hands about a lot to buy and sell shares. Now everything is done ‘virtually’ using fancy electronic systems. That way, anyone with access to a computer, even in Rangoon, has the same opportunity to buy shares as you do.

In fact, now that there are online brokers you can buy and sell shares from the comfort of your own computer. Use a service like TD Waterhouse and you can trade in shares, funds and all sorts of equities-related products very cheaply.

The ‘index’ part of 'stock market index' is simply a way of summarising the performance of a large number of companies’ shares. The more people like a particular company, the more they want to buy shares in it. The more people want to buy shares the higher the price goes up, as with any open market (supply and demand). So when the shares in a company go up a lot, and there are a lot of shares being bought, that company goes up in the index.

When you hear people on the news saying that ‘the FTSE has risen 100 points today’, it means that the perceived value of the FTSE 100 has gone up that day as people have been investing more money in it.

Say the FTSE 100 index rises by 100 points from 5,000 to 5,100, that means it has gone up by 2%. So that means that overall, after all the buying and selling of shares in big companies that day, the total value of those companies has gone up by 2%. That’s not that all those companies have suddenly increased their profits. It’s just that other people (investors like you and I) think they are more attractive.

If you’d like to learn more about investing in shares in the UK, there are a number of FTSE indices to get your head around.

The FTSE All-Share

The FTSE All-Share measures how all the companies listed on the London Stock
Exchange are doing. This includes each one that sells shares to the public, from the very big household names like British Telecom to the little tiddlers, such as estate agents.

This is a common index for tracker funds to follow, because it spreads investment across a range of industries and different-sized companies. Tracking this index is a simple way to get some of the general action of the long-term upward trend that shares have.

The FTSE 100

The FTSE 100 measures the largest 100 companies by value. This includes British-born heavyweights, such as BP, Barclays and Tesco. Grouped in the FTSE 100 (often just called the Footsie) are a handful of multi-national mining groups such as the world’s biggest miner, BHP Billiton, drug makers like GlaxoSmithKline and cigarette companies like British American Tobacco. Many of the companies in this index have higher profits than the GDPs of entire countries in the developing world. In fact, the top 100 companies represent about 80% of the wealth of the FTSE All-Share so you can get a pretty good idea of what the stock market is doing from what these top 100 companies are doing, which is why they report on the FTSE 100 in the news.

Rises and falls in the index reflect both specific events - like major fraud in any of the companies - and changing world economics. Things like the British government raising interest rates, and conflicts that threaten the supply of oil in the Middle East (and therefore the price) have an immediate effect on the index. If business is booming generally and everyone is feeling positive, this will make the FTSE go up. If people are worried about the future of the UK economy, then this tends to push the FTSE down.

The FTSE 250

The next 250 biggest companies in size are known as the FTSE 250. Companies in this index are generally known as the 'mid-caps', meaning that they have a capitalisation (worth) that is somewhere in the middle. Investors often choose to track this index if they believe the next few years will be bright for the British economy. They’ll look for signals like a falling unemployment rate, which means more people are holding down jobs and able to spend more on housing, travel and in stores.