and how does its performance affect the economy??
Its always mentioned in the National News but what really is its importance??
It measures the movement in the share price of the 100 largest public listed companies on the London stock exchange. If the companies do well and pay dividends to their shareholders then their share prices tend to go up. It's an indication of how well businesses are fairing, so quite important in terms of the economic climate. I could go on and explain what this means for pensions and jobs but hopefully that is fairly evident?
Lawrence
edit : Lawrence got their first.
It's the other way around - the economy affects the FTSE. The index is used on the news as a convenient barometer of economic growth. If the UK public companies that make up the index are doing well, their share price will ( eventually ) rise, and the FTSE will thus gain. It's handy tool to summarise where UK markets are compared to yesterday, last week, or ten years ago.
Indirectly, but not really the point of it on the news, there is some effect of the FTSE on the economy as it is a benchmark for many financial products ( investments ) and services ( fund management ). For example, "Beating the index" is a goal of many fund managers and financial products. Certain fees for financial products can be structured such that more is paid, the greater the investment performance above the index. Over a period of time, beating the index ( by selectively picking investments ) is harder to do than you might imagine.
Paul
It's a compound index of the top 100 listed companies. If all top 100 went up by 1% then so would the FTSE100. The stock market lists share prices at the rates that people are willing to buy them at, demand outstrips availability and prices go up and vice-versa. In theory you buy the shares based on the expected earnings of that share in the future, this is often based on future dividends for established or commodity companies or the propect of growth (and hence future dividends) for expanding companies or tech companies. It remains a barometer for the economy, if confidence is high then companies grow and their cash-generating potential rises, as the potential returns rise then so does the share-price. If confidence and the ecomony is down then the potential returns are limited and prices drop. The FTSE 100 is a compound of all these and therefore generally linked to the mood at the time rather than specific company performance.
Also possibly worth noting that companies can enter or be left out of the index dependent upon their market cap at the time of review.
Cheers,
Neil.
Also worth considering that the top ten members of the FTSE100 account for much of the index.
In fact, I believe they represent much of the FTSE All Share, too.
All excellent answers above.
Its also worth mentioning the FTSE100 is an indicator only, but a useful one.
For example another index, the FTSE 250 lists mid-sized companies who are very important in the British economy. There are also lots of very large companies which are listed elsewhere as they are foreign-owned, for example Asda, or many utilities firms. Others aren't listed anywhere at all as they have different ownership structure, like Alliance Boots, John Lewis, Clarks, Swire (who own Cathay Pacific) or Virgin Atlantic.
Thanks for the above answers. They, on the whole, set out what it is used for. I want to go further though.
What does it actually do...
When the value of shares go up in a company how does the company actually benefit (apart from the shares they are holding rising in value)?
and conversly what about the reverse? When share prices go down, do they lay off staff, cut costs?? if they do, are they doing this so the price of the shares go up, and if so why?. I cant see where the share price has a direct affect on the underlying company. They raised money on the original share issue but after that , how does the share value affect the company (up or down).
I understand that there are pension funds, investments and other financial instruments that are attached to the swing of the index (tracker funds etc) but what does it matter to the the people who dont hold investments in those funds? And further, the index yo-yo's constantly over the many years of its existence.
The fact that the index increases doesn't neccesarily indicate that the value of the underlying assets have increased in value apart from the perspective of the current investors surely.
When it comes down to it, isnt it just a gambling index, who's real worth is only of interest to those gamblers partaking at the time???
You don't need to go further. The index doesn't "do" anything. Share prices reflect current investor opinion of future business success, they don't cause anything. Layoffs are due to business contracting, which may likely be indicated ( but not caused ) by a low share price.
Paul
So it really is just a "gamblers" index then.Originally Posted by Tokyo Tokei
Excerpt from WikiPedia which I found interesting:
Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time.
[1] In contrast putting money into something with an expectation of gain without thorough analysis, without security of principal, and without security of return is gambling.
Putting money into something with an expectation of gain with thorough analysis, without security of principal, and without security of return is speculation.
As such, those shareholders who fail to thoroughly analyze their stock purchases, such as owners of mutual funds, could well be called gamblers.
Indeed, given the efficient market hypothesis, which implies that a thorough analysis of stock data is irrational, most rational shareholders are, by definition, not investors, but speculators.
The main reason that a company wants its share price to go up is that the Board will get fired if the institutional shareholders don't think the management are doing a good job and they think someone else could do it better.
Insurance companies and pension funds invest their customers' funds in part in equities, so share prices affect the value of pension savings for those who are about to retire (assuming they aren't in a final salary scheme). Trading in shares, especially short term, is a kind of gambling, but saving funds for a pension or house purchase and investing in index trackers is possibly more investing than gambling. There is a long history of equities returning more than other asset classes such as bonds and cash, because investors demand a premium for the extra risk that goes with equities. Over the last few years equities have not done well but economies always go in cycles. The only person I have ever heard of who believed they could end this cycle was G.Brown, and that didn't end well.
Lawrence
Two things:
1) It's an index, based to a set point in time, and the difference between 100 (the base time period) and the current value of the index is the cumulative change in the values of the stocks thus included. Since it is based on 100 stocks chosen by the Financial Times from the London Stock Exchange (hence FTSE, Financial Times Stock Exchange or "Footsie"), based on their market capitalization to reflect the top 100 stocks exchanged on that market, the content of that index changes over time as companies grow and decline over time.
2) It is used as one of the premier benchmarks for return on equity when buying stocks. If the stocks you are buying outperform the FTSE 100, then you've purchased stocks that have outperformed, in terms of return on equity, the top 100 stocks of the LSE. As a result, it is one of the premier benchmarks for the UK when making the decision which kind of mutual fund, for instance, to purchase as an speculative purchase.
Now, that said, you purchase stocks for two reasons: the first speculative, the second dividends. While the latter has largely fallen out of favor for those with money (as it is a decision by the company that you as an investor cannot usually influence and many running companies are relatively loathe to disburse profits instead of reinvesting them), it has started to make a bit of a comeback for those choosing stocks for their dividend payments as part of their portfolio purchases. However, most people buy stock because of the relatively large short-term speculative gains that can be realized, as well as long-term appreciation of capital.
The importance of a stock price, which, summed and weighted, represents the FTSE 100, is the implicit desirability of that stock for the stock-purchasing investor. While value investing (buying stock of companies based on their long-term economic value, rather than on dividends or expected short-term speculative gains) has also fallen out of favor (largely because it is hard to get a feel which companies will provide this), it is where serious fortunes are made (and some lost).
Finally, stock prices reflect the discounted expectations of future profitability for those companies. Given that GDP, on the income side, is made up of corporate profits and real personal disposable income, an increase in a stock price indicates that investors expect those companies to increase their relative importance in overall economic development. If I think that company X is going to increase their profits well beyond their competitors (such as Apple, for instance), then demand for that company's stocks will increase, and, given the limited number of shares available, the price of that stock will increase.
That said, automated trading, high frequency trading, as well as demand driven by portfolio requirements, all deviate from these fundamentals. The way the market looks today has, more often than not, nothing to do with fundamentals, but rather is driven by too much money chasing the chimera of high levels of returns without risk (there is no such thing in the real world), leading to a highly speculative, highly chaotic and at times rather irrational (i.e. not reflecting stock fundamentals) pricing of equities on markets. This is not a good thing.
:-)
Excellent summary (IMHO)
Pete
Not necessarily correct. The share price impacts a companies WACC (weighted average cost of capital). Generally as the share price moves higher the company's cost of borrowing will decrease. Therefore if a company is looking to invest and grow, a higher share price is better.
This is oversimplyfying but essentially the company needs to sell a lower proportion of its future income in the form of shares to raise money when the share price is higher.
A higher index therefore reflects lower WACC conditions for index constituents. I agree though that prices reflect investor expectations about future success/ prices more than any other factor.
I havent read a better summary in a while. The only thing i would disagree with is that irrational pricing is a factor of this market - "irrational exuberance" has been A part of the markets since day one, imho.
Posting Permissions
Reply With Quote