The FTSE 100 Index, also known as Footsie in the list of popular jargons used on the London Stock Exchange, is the second highest valued stock index of the United Kingdom after the FTSE all share index. The Index comprising of the top 100 stocks of the largest listed companies on the London Stock Exchange in terms of their market capitalization and sales revenue, which at any point of time represents at least eighty percent of the total market capitalization of the London Stock exchange itself. The index, though based out of London and representing equities listed on the London Stock Exchange, has an international flavour that is a representation of the fundamentals of business of the British Economy.
While determining what the true nature of the FTSE 100 one needs to understand what it truly represents. When someone likes to look inwards at the London Stock Exchange, any of the indices representing it should be representative of the overall British Economy. What the observer misses out is that London is a financial centre of the world, attracting businesses from all over the world and is also the leading finance services hub to businesses the world over. So, to say or assume that FTSE 100 is or should be a representative of the British economy is unfounded. The Index over the years of its existence has thus taken up this character and as such can be said to be an index representing the international trade and commerce perspective of the British Economy.
One mistake that people often make in their understanding of a stock index is that they believe that it is static and the growth in its value is over a fixed base value. This notion is farthest from the truth; the FTSE 100 index or for that matter any other stock index of the world is designed to be dynamic in more ways than one. It not only captures the growth of companies in terms of their capitalised values, but also captures how anywhere such changes are taking place on a continuous basis. The deletion and inclusion of companies on the index also symbolises what industries or sectors are finding traction with the investors and those which are losing out. The best example perhaps to understand this is to look at the dot com bubble of the nineties; during the period the market capitalizations of tech companies sky rocketed and with it the price prominence of major world indices; when they collapsed, so did they lose out on the positions of their respective indices to be replaced by companies belonging to other sectors. This goes on to show that a stock index is designed not to cling on to any one company, or one sector or any other select aspect that is part of the representation of the stock exchange.
Every stock index however has a story to tell, if it has behaved in a certain way then there must be a good reason why it has done so and it is up to the person analysing it to draw appropriate conclusions from the same. It is foolhardy to say that a stock index has acted out of character, when its very objective is to portray the changing character of the stock markets along with the business and economic fundamentals of an economy. The FTSE 100 index is a representative of the top segment of the London Stock Exchange. It not only captures the growth of the companies in this segment but also how the nature of business and economic fundamentals have changed for the British economy during a particular period time, and so is also the case with the FTSE 250 index and the FTSE All Share index.
One may or may not use an index if it suits his or her needs, but it is not the purpose of the index to fit into anyone’s needs. Several conclusions may be drawn from a stock index at any point in time, while it may not be indicating towards any particular direction. Given the size of a stock index, any sudden or unwarranted movement can affect the sentiments of the entire market and in the same way market wide sentiments can impact the movements of a stock index. Stock Indices thus, especially the large ones like the FTSE 100, are used to study larger economic fundamentals and business environment aspects than just the performance of its constituent companies.
The people who observe and analyse the FTSE 100 index are also diverse. While many of the fund management houses use it as a benchmark to gauge the performance of the funds managed by them and are more concerned about the upward and downward movement and the corrections and rallies, they hardly ever take interest in other conclusions that can be drawn from an index. Economists and researchers may very well draw a larger macroeconomic picture form the movement of this index by relating it with other macroeconomic variables. In both cases however, the conclusions may de different as statistically drawn conclusions could very well go in the opposite direction of economically drawn conclusions.
The FTSE 100 index over they years has been changing its character from being a national index to being more of an international index. Its constituent companies are increasingly expanding their operations overseas and more and more of their revenues are also coming from overseas. Going abroad always gives businesses an exposure to larger marketplaces whereby they can expand their revenues base and grow which, as a consequence, raise the status of companies listed on the London Stock Exchange. This increase in exposure also makes these companies less prone to macro-economic inefficiencies of the British economy so much so that they would be able to withstand an adverse politico-economic climate that may impact the domestic business environment in the country. The companies also bring in significant international revenues into the British economy helping it not only by strengthening its balance of payment situation against the rest of the world, but also by cutting down the risks posed by the economy due to its internal structural inefficiencies by pegging it with the international economy.
FTSE 100 index is very much a representative of the British economy. While some time back it conveyed more of the internal dynamics of the British economy, now it is transforming character to reveal more of the international business prowess of the British economy. It is banal to find fault with the FTSE 100 and say that it is meaningless, poor, unrepresentative or too narrow. The index has stayed true to its purpose and is reflective of the changes taking place in its representative segment of the British economy. However, it is for the observer to refine and expand his understanding of the index and use it suitably to meet his objectives or choose a different index that would suit his purpose better.
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