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If you’ve ever listened to or watched a news broadcast, you’ll no doubt have heard a sentence such as ‘The FTSE 100 closed six points up’. But do you actually understand what it means?
Recent studies into ‘financial literacy’ in the UK suggest it might well go over the heads of a lot of people. The Money Advice Service’s director of financial capability, David Haigh, recently spoke of ‘worryingly low levels of financial knowledge in the UK’ flagged up by an OECD study, while a survey reported that terms such as ISA or the current Bank of England base rate confuse large numbers of Britons.
It’s perhaps fair to say that a great many people will either be completely none the wiser about what those words on their news broadcasts mean – or might have only the vaguest ideas of what they refer to.
There’s perhaps no need for the average person in the street to have the encyclopedic knowledge of the market and the FTSE 100 that a trader would have, but it certainly pays to understand the significance of this measure to make sense of the world around you.
There are two fundamental questions to consider about the FTSE 100. Chances are, they’re not things that we could all easily answer – but there’s no shame in that.
What does the FTSE 100 represent?
The FTSE 100 is a register (or index) of the 100 biggest firms that are listed on the London Stock Exchange (biggest, meaning in total share value). The name comes from ‘Financial Times Stock Exchange’ as the index was originally a joint idea from the London Stock Exchange and the Financial Times.
The FTSE 100 was launched in 1984 and started from an arbitrary base figure of 1,000 points. The value of the index is still expressed in a points value which relates back to this base figure. So a FTSE 100 of 7441 means that the index as a whole is now worth 7.441 times that of the original list of 100 in 1984. The higher the number, the higher the value of the shares of the companies listed on the index.
The list is updated every three months to reflect the changing valuation of companies on the exchange – with fewer than 30 of the original 100 still on the list today.
The points value is calculated in real time while the market is open and a large number of stock market investments are linked to the performance of this index. If it rises, their money is worth more.
Is the FTSE 100 a good reflection of the state of the economy?
With that last point in mind, many people see the FTSE 100’s performance as a barometer of the economy as a whole. While it’s a clearly a decent shorthand for people with market investments and with an interest in the biggest companies in the country, it has its limitations.
The FTSE 100 companies are quite often international in their scope, making about three quarters of their money overseas. This not only means that their performance doesn’t reflect what’s necessarily going on in the UK, it also means that their success can be misleading. These companies earn revenue in foreign currencies – meaning that a fall in the pound can increase their value. This happened after the recent EU referendum, with the fall in Sterling contributing to a rise in the FTSE 100 index.
Telegraph group business editor Ben Wright has argued that this is why the FTSE 250 – the index of the 250 largest companies – is a better measure to focus on. It brings in more domestic-focused companies and, as a result, is better if you want a measure of the health of the economy.
Most Britons probably don’t understand what the FTSE 100 is and what is represents. By doing so, they’ll not only be more clued up to understand news broadcasts, but they’ll also get a better feel for what’s going on in the world around them.