What is the 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 experts take to the news outlets as soon as it does either of those things (mostly when it goes down).
But what is the FTSE? And why do we care so much about whether it goes up or down?
The FTSE originally stood for the Financial Times Stock Exchange. This is the name attributed to a set of British stock market indices that show how well companies listed on the London Stock Exchange (LSE) are doing compared to each other.
The LSE is a huge marketplace where fund managers are continuously monitoring performance, and then buying and selling shares for their managed funds in companies depending on what the statistics are showing them.
Remember: When you buy shares in a company, you are actually buying a small piece of that company. Or, if you’re Warren Buffett, you’re buying a big chunk of that company, or the whole thing.
a bit of history
In the old days, the market used to involve men coming together in a crowded room filled with big screens streaming constant data. They would then proceed to yell and wave their hands about a lot as they bought and sold shares. If it makes it easier to picture the scene, think The Wolf on Wall Street without Leonardo DiCaprio, and definitely without the movie’s uncomfortable storyline.
Nowadays everything is done virtually through the use of fancy electronic systems that track the numbers automatically from the comfort of a secluded office. Anyone with access to a computer effectively has the same ability to buy shares as anyone else.
The ‘index’ part of the ‘FTSE index’ is simply a way of summarising how a large number of companies’ shares are doing. The more people who like a particular company, the more people want to buy shares in it.
And, more importantly, the more people want to buy shares in a company, the higher the price to buy it is, according to the rules of supply and demand (the lower the supply, the greater the demand and the greater the demand, the lower the supply).
So, when shares in a company go up a lot in price, as an increasing number of shares are being bought, that company goes up in the index. The value of that company, as far as the index is concerned, is the number of shares that company has multiplied by the price per share.
For example, Company x has 1,000 shares. Each share is worth £10 so the value of the company is £10 x 1,000 which is £10,000.
how the index works
Thinking of the companies within an index collectively, it becomes fairly obvious that, if multiple companies within that same index are performing particularly well and are seeing large inflows, then the entire index goes up. Conversely, if the opposite happens, then the entire index goes down.
For example, during trading on 22 August 2019, the FTSE 100 was down 68.88 points, which translates to -0.96%. This means all the buying and selling of shares in the big companies making up the FTSE 100 that day has led to an overall decrease in value for the FTSE 100.
This is just an example of one day of trading for the FTSE 100. As you can imagine, things can change very quickly on the stock market. A quick visit to the LSE website would show you how the FTSE has performed up to five years ago.
We like index-tracking funds, or ‘trackers’, at MoneyMagpie. They’re cheap, easy to invest in (you don’t need a broker to do it) and they work better than most managed funds. Find out about index-tracking funds here, including how to invest in them.
Alternatively, you might hear the term ‘ETF’ floating around on the news or being debated on by industry professionals. ETF stands for ‘exchange-traded funds’. They follow the same structuring rules as index-tracking funds, but ETFs can be listed on the stock exchange and bought and sold just like shares – usually more quickly, too, which promotes liquidity.
ETFs have been rapidly emerging in recent years as the preferred vehicle when looking into passive investment.
If you’d like to learn more about investing in shares in the UK, including which index you might like to track, there are a number of FTSE indices to get your head around. We cover the main ones below.
When people ask about what FTSE is, they are usually referring to the one mentioned in the news most, which is the FTSE 100.
In essence, 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 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 how the top 100 companies are performing. (That’s why they report on the FTSE 100 in the news).
Recorded rises and falls in the index can reflect specific macroecnomic events – like major fraud in any of the 100 companies and changing world economics.
Ongoing Brexit negotiations and the uncertainty surrounding trade war talks between global superpowers China and the US usually have an immediate effect on the index.
If business is booming and everyone is generally feeling positive, this will make the FTSE go up. If people are worried about the future of the UK or global economy, then this tends to push the FTSE back down.
The next 250 biggest companies in size are known as the FTSE 250. These are companies ranked from 101 to 350 in the index.
These companies are generally known as the ‘mid-caps’, meaning they have a capitalisation (a worth) somewhere in the middle compared to the other companies in the index.
Investors often choose to track this index if they believe we are set to enter a period of growth in the economy. Investors will also look for signals such as a falling unemployment rate, which means more people are holding down jobs and able to spend on housing, travel and luxuries.
- MoneyMagpie guide to index-tracker funds – get the lowdown on the easy way to invest in the stock market