Are you confused by stocks, shares and the FTSE 100? If so, you’re not alone. Unless you work in finance it can seem a daunting subject to unravel. The good news is that it’s simpler than you might think. Here’s the FTSE 100 explained.
What is the FTSE 100?
The FTSE 100 was created in 1984 and comprises the 100 largest companies listed on the London Stock Exchange. The exchange is the largest stock exchange in Europe and lists thousands of stocks from 60 different countries.
What does FTSE stand for?
The FTSE is an acronym for Financial Times Stock Exchange. It was initially owned by the Financial Times and the London Stock Exchange but is now owned by the London Stock Exchange.
How is the FTSE 100 calculated?
Companies on the index are ranked in terms of their company's market value, also known as market cap' for short). The FTSE 100 is, therefore, a list of the top 100 largest companies in terms of their value. This is worked out by the index by:
1. Multiplying a company's current share price by the number of shares sold to and held by investors.
2. Then this is multiplied by the number of shares still left to be traded (sold).
The resulting figure shows you how much a company is worth according to the market.
What kind of companies are in the FTSE 100?
The top 100 includes multinationals such as Unilever, BP and HSBC holdings, and British 'blue chip’ (high-value safe investment) companies like Prudential and Vodafone.
How do you read the FTSE 100 index?
It sounds complicated to hear news of the FTSE 100, but once you get to grips with the jargon, it's relatively simple.
- As a company's share price increases, so will its market value, which changes the FTSE index.
- This may be followed by mentions of specific shares or industries that caused a significant gain or loss, such as the sliding of mining stocks (loss) or the rising housing market (gains).
- As a company's share price changes, so will its market cap, and the overall index will change in value.
- How much a company moves depends on the company's weight (strength) in the index.
- So price fluctuations in price either way, in, say, big weighted companies like AstraZeneca or Shell will have a more significant effect on the overall index than a smaller company.
What are the annual returns of the FTSE 100 over time?
The FTSE 100 index has existed since 1984. Throughout its 30 year history, companies have delivered an average return of approximately 8.9% a year, a healthy payout for investors given that UK interest rates are close to zero.
It sounds impressive, but the market fluctuates hugely. So if you invested £1000 over the last five years, it would only be worth around £1,030 today (excluding fees) and a little bit more with dividends (this is when some of the profit companies make from selling their wares is given to the shareholders).
Why is the FTSE 100 important?
The FTSE is important because the index's performance impacts investments, like pensions and stocks and shares ISAs.
The FTSE is also a good indicator of the UK and international economy as it changes in response to political and economic events. This, in turn, affects the confidence of investors who, when nervous about the economic outlook, sell their shares and, when confident, buy more shares.
How can you invest in the FTSE 100?
There are two ways to invest in the FTSE 100:
- By opening a share dealing account (either online or through a broker) and then buying through a trading platform like Barclays Smart Investor Investment Account.
- Or you can invest in the whole FTSE 100 using an Index Tracker Fund.
What are some of the other indices out there?
There are approximately 5,000 US indexes. The three most widely followed are the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite. In the UK, there is also the FTSE 250 (also known as the UK 250) and the FTSE AIM (Alternative Investment Market), which contains companies like ASOS, BooHoo and Jet 2. In Japan, there is the Nikkei 225 and Tokyo Stock Price Index, commonly known as TOPIX.
How can you explain the FTSE 100 to kids and teens in simple terms?
The above may seem a dry subject for kids and teens, but you'd be surprised at how much kids and teens already know about investments and shares. Our latest Youth Economy Report found that 1.33 million UK kids (13%) currently invest in cryptocurrency alone.
The best way to talk about the FTSE 100, investing, and shares is to make it age-appropriate and relevant to your child's life. For example, explain that anyone can own a little bit of their favourite company, be it Apple, Nike or Netflix by buying shares in the company – and if you invest at the right time, you can grow your money. Shares are bought and sold at a stock exchange (a marketplace) via apps or through a broker.
An excellent example of how shares can make you money is Netflix. Their shares are currently worth £192 each. However, if you had been clever and bought Netflix shares twenty years ago, you would have paid 32p a share.
This means 100 shares in 2002 would have cost you £32.00, and today those same shares (had you kept them) would be worth £19,200!
However, be sure to explain that shares also go down. Especially if you invest in a company that doesn't do well, in which case you can lose all your money.
Fun activities you can try
A fun way to learn about investing and stocks and shares is with Money Missions on the GoHenry app. This is a great way to help your kids understand investing in shares via bitesize money lessons on how it works and how they can save and invest.
And while your child may not be able to invest on their own before they turn 18, you can open a Stocks and Shares Junior ISA for your child when through the GoHenry app and contribute up to £9,000 each tax year.
Related articles
Activities to teach your kids financial literacy
How to teach kids the value of money
Financial literacy resources for children
How old do you have to be to get a credit card?
What age can you get a debit card?
