What are FTSE Indices?

Explanation

Financial Times Stock Exchange (FTSE), also called “Footsie,” is an organization specializing in evaluating the financial marketFinancial MarketThe term “financial market” refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.read more index. It provides the average free-floating index of the companies covered in the FTSE Group, which is calculated by multiplying the current market price of the share of the company with the number of shares issued in the market which are available for trading in the market. The purpose is to give the company that having a larger share of market capital gets more attention and is the driving force of the market index compared to the smaller companies. These indexes are updated in real-time and regularly.

History

FTSE Group was originally an independent organization created through a Joint Venture between the London Stock Exchange & The Financial Times in 1984. And currently, the FTSE group is a full-time subsidiary of the London stock exchange. It provides the index based on the market capitalization ratio of all the blue chipsBlue ChipsBlue chip stocks are issued by companies possessing large market capitalization. Blue chip companies are market leaders. They provide good returns on stocks, offer dividends, and are considered safe investments.read more or companies listed on the London Stock Exchange.

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Types of FTSE Indices

These indices are of different types, and some of them are as follows –

  • FTSE 100- This index is the most widely used in the UK economy. It represents the overall performance of the UK economy by measuring the capitalized value of the market of the UK economy by taking the records and values of the top 100 companies listed on the London Stock Exchange, which are ranked based on their market capitalizationMarket CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more. This index also resonates with the currency ‘pound’ exchange rate fluctuation.FTSE 250- As the FTSE 100 is evaluated by using the capitalization value of the top 100 companies (which can also be termed as Big Giants) in the UK Market, which almost covers 80% of the total market capitalization; FTSE 250 is calculated by using the value of the next 250 companies (mainly ranked from 101th to 350th company).FTSE 350- This Index is calculated by considering the market capitalization of all the 350 companies covered by the FTSE 100 & FTSE 250. This index is less likely used compared to the FTSE 100 & FTSE 250. However, this index covers all the large-cap companiesLarge-cap CompaniesLarge-cap stocks refer to stocks of large companies with value, also known as the market capitalization of 10 billion dollars or more, and these stocks are less risky than others and are stable. They also pay a good dividend and return, and it is the safest option to invest.read more and medium-cap companiesMedium-cap CompaniesMid-Cap stocks are the stocks of the companies having medium market capitalization. Their capital lies between that of large and small cap companies and valuation of the entire share holdings of these companies range between $2 billion to $8 billion.read more.FTSE Small Cap- This Index is calculated using the values of the companies with relatively lower market capitalization and large numbers.FTSE All-Share – FTSE All-Share Index accumulates and comprises the valuation of the FTSE 100, FTSE 250, and FTSE Small Cap.FTSE Fledgling – FTSE Fledgling Index comprises the companies registered on the London Stock exchange with relatively very small market capitalization and are not qualified to evaluate the FTSE All-Share Index. The newly registered companies mostly comprise this category, but it does not necessitate that only the newly formed companies are to be included.

Example

For understanding the concept, let’s take an example by analyzing the volatility and the opportunities that lie with the investment in FTSE Indices.

For example, let’s consider the following information in the table for the evaluation of the FTSE 100 –

Let’s evaluate the following scenario through a chart representation:*(The figures are hypothetical)

When the user analyzes the following chart, he can emphasize what the period is providing the maximum profitability in the FTSE 100 index depending upon the short-term investmentShort Term InvestmentShort term investments are those financial instruments which can be easily converted into cash in the next three to twelve months and are classified as current assets on the balance sheet. Most companies opt for such investments and park excess cash due to liquidity and solvency reasons.read more to be made and a long-term investmentLong Term InvestmentLong Term Investments are financial instruments such as stocks, bonds, cash, or real estate assets that a company intends to hold for more than 365 days in order to maximize profits and are reported on the asset side of the balance sheet under the heading non-current assets.read more.

How to Invest in FTSE Indices?

There are different ways to invest in the FTSE. For example, one cannot invest directly in a London Stock Exchange but can purchase shares of the company covered in the FTSE index or invest in Exchange Traded Funds (ETF).

For purchasing the shares in the companies listed on the London Stock Exchange, the investors have to register with an authorized dealer. Then, the investor can purchase a single share of the company to make his index or purchase shares as per his choice.

If the investor wants to invest in all of the companies without relying on any single company or group of companies, the investor can invest in the Exchange Trade FundsExchange Trade FundsAn exchange-traded fund (ETF) is a security that contains many types of securities such as bonds, stocks, commodities, and so on, and that trades on the exchange like a stock, with the price fluctuating many times throughout the day when the exchange-traded fund is bought and sold on the exchange.read more (ETF) of FTSE. It comprises all the companies related to the selected group like FTSE 100 or FTSE 250 etc. and lets the investment of the investor grow at the same rate as the index of the particular group matures or grows.

Conclusion

FTSE Index evaluates and provides the overall capitalization value of the market and provides the companies or groups of companies who have the most influencing power over the market. As a result, investors can utilize the opportunity through investment and make a profit by evaluating the market and utilizing the fact that the market is volatile and dynamic.

Investors can make or earn a profit in the short term through investment in shares of the FTSE through a broker and selling their stocks at their conveyance and profitabilityProfitabilityProfitability refers to a company’s ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company’s performance.read more to keep their liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more flowing, but this comes with subsequently greater risk of making a loss as well. In contrast, the investors who are more interested in long-term investment and relatively low-risk rate can make their investment in the ETF plan of the FTSE Groups, which provides the investment in diversified market competitors and thus results in less overall risk associated with it. In current scenarios, the FTSE has recorded a downfall. However, depending on the improvement in the situation, it can also result in an opportunity for the investors to make a profit.

This article has been a guide to FTSE indices and their meaning. Here we discuss the history, types of FTSE index, an example, and how to invest in it. You can learn more about it from the following articles –

  • Stock IndexStock ExchangeCyclical StocksWorkings of a Stock Market