Page 2: Financial indices
Index values are used to show how a particular average figure changes over time. For example, the FTSE 100 Index sets out the average figure for the value of a basket of the shares of the top 100 UK companies quoted on the London Stock Exchange (LSE). This index serves as a useful indicator of how the UK economy is performing. A rising index signals investors' increasing confidence in the outlook for business.
Another important indicator for the UK economy is the FTSE All-Share Index. This covers around 90of the UK market. The average of share prices in these companies is compared against a base year that was given a figure of 1,000. If today the figure is 3,000 this shows that, on average, share prices in these companies are three times higher than in the base year. Investors can examine the index daily to see if it is rising or falling. A rising index is a good indicator of increasing confidence in the companies that the index covers.
Investors will want to compare the performance of one index with that of another. For example, a comparison to see if the FTSE 100 Index is performing better than an:
- index of shares in American companies
- index of shares just in a particular market sector (e.g. oil or telecommunications).
In addition, investors will want to compare the performance of shares of a particular company in an index against the overall index e.g. how are the shares of Marks and Spencer (a company in the FTSE 100) faring compared with the FTSE 100 as a whole?
Being sufficiently large or important to be included in an index is a key status symbol for a company. It also provides increased investment in the shares of a company due to index following by investors. Senior managers will seek to maintain the performance level required for continued inclusion because of these reasons. Rising companies can enter the index and others leave it in the course of time as witnessed by the rise and fall of a number of prominent dotcom companies during the boom and subsequent 'bust' of some of these companies at the turn of the millennium.