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What is the Stock Market?

VIDEO: We're at the whiteboard looking at what is a stock market, and how investing in the FTSE works 

Holly Black 4 December, 2020 | 11:11AM
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Holly Black: Welcome to the Morningstar Investment Board. I'm Holly Black. Today, we're talking the FTSE. What is the FTSE? It is the UK stock market. It stands for Financial Times Stock Exchange Group.

What is a stock market? Well, what is any kind of market? It's a place where you buy and sell things. So, on a stock market, you buy and sell stocks and shares. So, the FTSE 100 is the main one we talk about. That is the 100 biggest UK-listed companies by their market cap. What is market cap? It is the number of shares in issue multiplied by the share price. So, if you have 1 million shares and they are £1 each, your market cap is £1 million, if only it was that simple.

Another FTSE that we talk about is the FTSE 250. That is businesses 101 to 250 in size. And we also have the All-Share which is about 600 companies. So, companies in the FTSE 250 are a bit like companies in the division one of football and they just live in hope of being promoted up to the Premier League. So, we have every three months a reshuffle, think of that as transfer season. So, if company 101's market cap gets big enough, it gets bumped up into this group.

So, when we talk about investing in the stock market, that is an amalgamation of all the shares that are trading on that and how they all move creates the movement of the stock market overall. So, when you see those scary headlines of the FTSE fell 1 million percent in one day, not mathematically possible, but that's because everything bombed. That doesn't tend to happen all that often. Does get a bit scary when it does. So, let's look at an example.

Let's imagine our fake FTSE just has four companies on it, mostly because my whiteboard and my mathematical skills don't extend much further than that. Company one is worth £100 million; company two, £50 million; company C, also £50 million; company D is a tiddler, is worth £10 million. So, over a period of time, company A's shares go up by 10%, company B's drop by 20%. Company C's, they don't do anything, just sort of stay flat, no movement. And company D has had a stormer. I don't know, maybe they got some profits and a new product patented, their share price doubled. So, this company is now worth £110 million. This company is now worth £40 million. This is the same, £50 million. And this one has doubled to £20 million. So, if this all before added up to £210 million, that would be the total value of our index. After all of the share price moves, the index as a whole is worth £220 million. So, even though we've had all of these disparate changes, we would say the stock market had only moved by 4.7%.

So, let's imagine that on a graph just to show. So, we would have company A – so, if we'll start here, company A has gone up 10%, company B went down 20%, company C stayed the same and company D went up there. What does that mean for our stock market overall by the time we've even weighted according to how big those companies are, so it only moved by 4.7%. So, we're invested in a FTSE tracker, this is where we would end up. And that's a FTSE.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Black  is Senior Editor, Morningstar.co.uk

 

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