FTSE Index

The FTSE is a stock market index that indicates how well the economy is doing. The number after the letters (i.e. FTSE 100, FTSE 250, etc) tells you how many of the top stock market companies are listed in a particular index.

In this article, we will take a look at why people need to pay attention to the FTSE and how it works. Bookkeeping outsourcing can be the best solution to the problem in case you find the task difficult.

What is the stock market Index?
What does “FTSE” stand for?
What does the number after FTSE mean?
How is the FTSE Index calculated?
What does it mean when the FTSE Index value changes?
Why should anyone care?
What other FTSE Indexes exist?

What is the stock market Index?

First, let’s figure out how the stock market works. It is common for large companies to let investors buy shares in their company. To sell these shares, or stocks as they are sometimes called, they list them on the stock market. All of the shares issued by companies circulate on the stock market.

Indexes show us how the groups of different players are doing on the market. Groups can be formed on any basis, be it an industry, a region, or size. There is an index for American companies traded on the London Stock Exchange. There is one for transportation companies and one for those who deal in oil.

Several of the most trusted groups of indexes on the London Stock Exchange are those calculated by the FTSE. The most popular index, FTSE 100, lists the hundred most expensive companies on the market. The aim of this index is to have a clear picture of how well the most influential businesses are doing. And this, in turn, helps to paint a clearer picture of the whole economy.

What does “FTSE” stand for?

The FTSE was first introduced in 1984 by the British financial newspaper the Financial Times together with the London Stock Exchange (LSE). So “FTSE” stands for “Financial Times Stock Exchange”.

What does the number after FTSE mean?

There are various FTSE indexes — FTSE 100, FTSE 250, FTSE 350, etc. The number after FTSE reflects the number of companies included in the index, so FTSE indexes may show 100, or 250, or 350 companies.

Sometimes such companies’ stocks are referred to as “blue chips”. A blue chip in poker is a chip with the highest value, which means that the shares of the blue-chip companies are valued most on the market.

How is the FTSE Index calculated?

Here we return to the company’s market value.

The index value is calculated using the following formula:

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So, it is calculated by:

  1. Multiplying the company’s current share price by the total number of shares they have issued.
  2. Multiplying that number by the company’s free-float adjustment factor, which is the number of stocks that are currently on the market and are available for purchase by private investors.
  3. Dividing the resulting number by the index divisor, which is a number that was chosen at the creation of a price-weighted stock market index in order to make the index easier to understand.

As the economy grew, so did the index. When the FTSE 100 was introduced for the first time, it was intentionally set at 1,000 points to make it an easily memorizable figure. Now the Index is roughly at 5,600 points. It means that the market value of all companies in the index has increased by 5.6 times.

Here is an illustration of the peaks and dips of FTSE 100 since 1984:

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Source

Here you see that the index crashed in the late 1990s during the Dot Com bubble; the same thing happened during the US mortgage credit crunch of 2008.

The index is calculated on workdays in real-time. It’s announced as a number, for example, “Today the FTSE 100 opened at 6,350 points.”

What does it mean when the FTSE Index value changes?

On the news, we hear phrases like “the FTSE 100 fell 30 points and opened at 7,350” on a daily basis. Sometimes we also hear which industry or company caused this loss or gain.

Since the index reflects the market value of many companies included in it, then its overall value can change when share prices of its constituent companies change. But how much a certain company affects the whole index depends on its weight in the index.

Why should anyone care?

Every FTSE Index includes the most profitable companies traded on the London Stock Exchange and covers all sectors of the economy. This information is important for people planning to invest in companies included in the Index as it shows them whether the moment is right for investing.

However, if you invest in a specific company included in the FTSE Index, then you should be aware that changes in index value do not necessarily reflect changes in the share prices of the company you are interested in. For instance, the FTSE 100 is dominated by companies working in the oil & gas and financial sector. If you invest in healthcare and there’s a fall in the FTSE 100, it can be caused by a drop in oil prices and not the industry you are interested in.

The FTSE 100 is dominated not only by companies working in oil & gas and financial services but also those involved in the sphere of consumer goods and basic materials. Other than that, it includes companies working in the sectors of consumer services, healthcare, industrials, utilities, telecommunications, and technologies. Most of the companies are primarily domiciled in the UK, while the rest are based in Ireland and other countries. At the same time, their primary revenue comes not only from the UK, but also from the USA, China, Germany, and other countries.

What other FTSE Indexes exist?

There are many more FTSE indexes:

FTSE SmallCap Index is an index that consists of companies with a small market capitalisation. When all companies are listed in descending order, from those with the biggest market value to the smallest, companies from the 351st to the 619th rating get included in this index.

FTSE 250 Index includes companies whose market value is lower than those included in the FTSE-100. It consists of the 101st to the 350th largest companies listed on the London Stock Exchange.

FTSE All-Share Index essentially consists of the FTSE 100 index together with the FTSE 250 (which makes FTSE 350), and the FTSE SmallCap Index. It includes more than 600 companies.
FTSE techMARK All-Share Index lists all companies included within the LSE's techMARK market, which means that they work in the fields of innovation and technologies.

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