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News - 16 September 2011

Why the FTSE 100 matters

We hear about the FTSE100 all the time, on the TV, radio, in newspapers, even broadcast on electronic notice boards at railway stations. But how does it affect us who aren’t working on the City of London trading floors?
Below the FTSE 100 is the FTSE 250, which lists the biggest 250 companies.  And then below them comes the FTSE Small Cap Index. The FTSE is so-called because it's run by a company part-owned by the Financial Times and the London Stock Exchange.

The FTSE 100 is the business equivalent of football's Premier League.  It's a league table of the companies with the greatest market capitalisation or whose shares are worth the most.
They don’t have to be British, some such as mining company Kazakhmys are foreign — but they are listed under the London Stock Exchange (LSE).

The FTSE index does not remain static: there are promotions and relegations. If you examined the index in 1986 you'd find Debenhams, MFI, Guinness, The Wellcome Group and Burmah Oil. Debenhams is still there, but others have disappeared such as Wellcome have been taken over and is now GlaxoSmithKline, or the now defunct MFI.
Depending on their fortunes, companies can go between the 100 and 250 index, this “shuffle” occurs every three months. Joining the FTSE 100 is a major achievement. Not only does it boost a company's profile but it means that investment funds tracking the index have to buy shares in it, which usually bolsters the share price. When investment group Hargreaves Lansdown — now facing relegation — joined in March the shares enjoyed a good run. Likewise, relegated companies often see their share prices suffer.

This is important because a picture of which companies are in and which are out tells us a lot. FTSE 100 firms like Burberry - promoted to the FTSE 100 in 2009 - are great examples of British companies making millions overseas from places like China, where people are still spending big. On the other side, a company like Barratt Developments, one of the nation's largest house builders, doesn't make the cut after its stock price collapsed as the property market hit the wall in 2007, while Argos' owner Home Retail Group  fell out of the index last year as it became clear that Britain's high street was going to be a tough place to operate for some time and online retailers took chunks out of its profits.

The FTSE 100 is an indicator for the health of UK Plc itself and reflects our own fortunes. In the recession, the FTSE 100 fell from above 6,000 in 2008 to below 3,500 in March 2009. It subsequently recovered and hit levels above 6,000 in February this year — a key level in terms of stock market confidence — but fell below 4,800 in August during the eurozone crisis.

The index also reflects the makeup of UK Plc in terms of the industries driving the economy. Back in 2000 there was an explosion of new technology companies. Many software and telecoms companies joined the index between 1999 and 2000, only to leave when the dotcom bubble imploded. (Irish internet company Baltimore Technologies, joined in 2000, the shares, which reached £13.50 in 2000, fell to just 36.5p in 2003 after the dotcom boom crashed.)

So the next time you hear about the FTSE, don't switch off but consider what its performance might mean for your own fortunes and the country's overall.

If you have any questions or wish to make a comment about this or any other of our articles, please do not hesitate to contact us

ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900  E-mail: abds@netaccountants.net

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