What is FTSE anyway?
You hear about the FTSE (pronounced ‘Footsie’) index all the time in the news and you read about it in money articles. It goes up and it goes down and we get all excited when it does either (mostly when it goes down).
But what is the FTSE? And why do we care so much whether it goes up or down?
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 Direct Investing and you can trade in shares, funds and all sorts of equities-related products very cheaply. (We take you through the process of investing in more detail below).
The more people want to buy shares the higher the price goes, 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.
If that happens to a lot of the companies in the index – i.e. lots of money is flowing into that group of companies – then the entire index goes up. If the opposite happens, then the entire index goes down.
When you hear people on the news saying that ‘the FTSE has risen 50 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 50 points from 5,000 to 5,050, that means it has gone up by 1%.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 1%.
That’s not to say 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.
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When people ask ‘what is FTSE’ they often refer to the one mentioned in the news which is 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 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. (That’s 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 next 250 biggest companies in size are known as the FTSE 250. These are company number 101 to company number 350 in the index.
Companies in this index are generally known as the ‘mid-caps’, meaning that they have a capitalisation (a worth) that is somewhere in the middle compared to the other companies in the index. 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 luxuries.
- Moneymagpie guide to index-tracker funds – get the lowdown on the easy way to invest in the stock market
- TD Direct Investing – if you want to get straight into the business of investing in various shares, funds and equities-related products, TD Direct Investing is a good (and cheap) way to start.