If you are new to investing in UK shares then the easiest shares to trade are those in the FTSE 100 index.
If you don’t yet know what the FTSE 100 is then read on and/or watch the video below.
You will learn what the FTSE 100 index is and how it works.
You will also learn about the other UK market indices and how they together make up the UK Stock Market.
FTSE 100 Index – A Beginner’s Guide
The first thing to say about the FTSE 100 is that it is a UK index.
It is therefore concerned with shares that are on the London Stock Exchange in the UK.
And it is an index.
So what do we mean by an index.
What Is An Index?
An index is a way of understanding whether the overall market or the shares in the index element of the market have gone up or down over a period of time and by how much.
The index does this by starting at a point in time and a particular value in time.
The FTSE 100 index was started back in 1983 and it was started with a value of 1,000.
That’s not a price and it’s not a cost.
It’s just a number, an index number that it started with and at the time of making this video the FTSE 100 index is round about the 6,000 mark.
That means the index has multipled in value by 6 times in between 1983 and around March-April time of 2012.
By doing so, it has vastly outstripped the value of inflation, bonds, savings and of any other form of investment that you could have made in that period of time.
So what is the FTSE 100 index then and how does it work?
FTSE 100 Index
Well, the FTSE 100 index is the top, or the largest, 100 shares on the UK stock market.
Of course, as the share prices of those 100 companies change over time, then the value of those companies in the index change over time.
And the FTSE 100 index needs to keep in it the top 100 companies.
So every quarter, four times per year, the constituents i.e. the companies, that sit in that FTSE 100 index, change.
So those that are no longer in the top 100 drop out of the index and those that have now grown in size and ought to be in the FTSE index come into the index.
In reality, it is a little bit more complicated than that.
There are some rules associated with index changes so that companies don’t keep doing the hokey cokey (or is it the hokey pokey) dance in and out of the index from one quarter to the next!
But essentially, what I’ve described is the concept.
So as we go forward in time, the FTSE 100 index always keeps in it, more or less, the top 100 companies by size.
And those largest 100 companies together make up about 81% of the total value of all of the companies in the UK main market.
The next 250 companies by size are known as Midcaps and they are in the FTSE 250 index.
By value they represent about 15% of the total value of the UK main market.
Combined, the FTSE 100 and FTSE 250 represent the largest 350 companies in the main UK market and are known as the FTSE 350 index.
Obviously that makes up about 96% of the total value of the companies in the main market.
The FTSE Smallcap Index is the next tier of companies and these make up about 2% of the market.
The companies in this index are known as Smallcaps.
FTSE All Share
If we add together the FTSE 100, the FTSE 250 and the FTSE Smallcap indices, then we get another index that is known as the FTSE All Share index.
In total then, all these companies make up approximately 98% of the total value of all the companies in the UK main market.
So we still don’t have all of the companies.
There are yet even more companies that are far too small to be in any of those other indices that I have already mentioned.
They sit in what is known as the FTSE Fledgling index, which when added to the other indices mentioned, comprise the UK main market in total.
But hang on a minute, we’re not done yet…
As well as the UK main market, there is another UK stock market known as the Alternative Investment Market or AIM, for short.
This was set up fairly recently and its purpose was to allow smaller companies to come onto the London Stock Exchange and therefore to raise finance for their business by getting investors to buy their shares.
The rules associated with AIM companies are not as stringent or as difficult to qualify for as they are on the main index.
Hence why AIM companies, AIM shares, are classed as a bit riskier than those on the main index because the rules to qualify as an AIM company and float on the AIM market are not as stringent.
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