Imagine the FTSE indices as a way to track different groups of companies listed on the London Stock Exchange, similar to how the Premier League and other divisions track football teams.
Here’s a breakdown of each group:
FTSE 100: The Premier League of UK stocks. It tracks the biggest 100 companies by market cap. This index tracks some of the biggest British multinational companies in the world, such as Shell, Unilever, AstraZeneca, Rio Tinto, HSBC, and BP.
FTSE 250: The Championship to the FTSE 100’s Premier League. It tracks the next 250 largest companies after the top 100. You might find companies here you recognise like Currys, ITV, WH Smiths, Trainline and Greggs.
FTSE 350: This index combines both the FTSE 100 and 250. So, it tracks the top 350 biggest companies by market cap.
FTSE Small Cap: These are the companies that are even smaller than the 250. They’re still listed on the stock market, but they’re not quite as big yet.
FTSE All-Share: This is the most comprehensive main market index. It tracks the top 600 companies on the UK stock market, including companies in the FTSE 100, 250, and Small Cap.
The FTSE 100 operates much like the Premier League, with teams (companies) facing evaluation (reshuffle) four times a year – in March, June, September, and December.
Just as the Premier League uses points to determine promotions and relegations, the FTSE uses market capitalisation (a company’s total market value) as its metric.
The companies with the highest market capitalisation at the close of business on the last trading day of the previous month secure their place in the top league (FTSE 100), similar to how top teams stay in the Premier League.
Those with lower market capitalisation might be relegated to lower tiers (FTSE 250 or Small Cap), mirroring teams moving down in the league structure.
If you are keen on monitoring the top-performing companies listed on the London Stock Exchange’s main market as a whole, the FTSE All-Share index is an invaluable benchmark to track. This index tracks the performance of companies across diverse sectors, big and small, offering a detailed overview of the UK equity market.
Small Growth Companies
Now, for a different market:
FTSE AIM: This is a whole different market altogether, called the Alternative Investment Market (AIM). It’s for smaller and younger companies looking to grow.
FTSE AIM 50: The top 50 companies on AIM, similar to how the FTSE 100 tracks the top 50 in the main market.
FTSE AIM 100: Similar to the FTSE 100, it tracks the top 100 companies listed on AIM.
FTSE AIM All-Share: Tracks all the companies on AIM, just like the FTSE All-Share tracks the whole main market.
Similar to how the FTSE All-Share index tracks all companies on the London Stock Exchange’s main market, the FTSE AIM All-Share tracks all companies listed on the AIM, providing a broader view of activity in the alternative market.
Investing in Indices
Indices themselves cannot be directly invested in. However, you can invest in or trade funds and other instruments that track their performance. These instruments include Exchange-Traded Funds (ETFs), Contracts for Difference (CFDs), and futures contracts. For example, in the UK, you can gain exposure to the FTSE 100, FTSE 250, or even the AIM market through spread betting, CFDs, ETFs, or FTSE futures.
Thorough research is vital before investing in any instrument that tracks an index. Each option has its own unique characteristics, risk profile, and fee structure. Here’s what to consider when researching each option:
- Functionality: How does the instrument work? Does it aim to perfectly replicate the index (like some ETFs) or offer leveraged exposure (like CFDs)?
- Liquidity: How easily can you buy and sell the instrument? Less liquid options might be harder to get in and out of quickly.
- Fees: Understand all associated fees, including management fees, trading commissions, and any potential spread costs (especially for CFDs). Fees can significantly impact your returns.
- Tax Implications: Depending on the instrument and your location, taxes on dividends, capital gains, or income earned might differ.
- Risk Tolerance: Some instruments, like CFDs, magnify both potential gains and losses. Ensure the risk profile aligns with your comfort level.
By carefully researching each option, you can make informed investment decisions that suit your financial goals and risk tolerance. Remember, there’s no one-size-fits-all solution, so understanding the nuances of each instrument is crucial for success.
Frequently Asked Questions
Who operates the FTSE indices?
The FTSE Russell subsidiary of the London Stock Exchange Group (LSEG) creates and manages stock market indexes, including the well-known FTSE 100 and the Russell 2000.
How do companies get listed on the London Stock Exchange?
Listing on the London Stock Exchange is a complex process and requires approvals from two authorities: the FCA (financial regulator) and the LSE itself. Companies will need to secure advisors and meet financial benchmarks. They must also prepare a prospectus explaining the company to investors.
