Learn About Investing
What are stockmarkets?
Stockmarkets are where shares in companies are publicly bought and sold. This activity mainly takes place through stock exchanges, which aim to ensure that trading is fair and orderly.
In Britain, trading shares dates back to the late 17th Century when brokers gravitated to Jonathan’s Coffee House in the City of London. In 1801 the London Stock Exchange was formally established as the the world’s first regulated stock exchange. It’s still going strong two centuries later and has since been joined by many others.
Nowadays the New York Stock Exchange is the biggest in the world, with London coming in fourth behind the NASDAQ (also based in New York) and Tokyo. While exchanges were physical locations in the past, increasingly the action takes place on electronic platforms.
Listing a company on a major stock exchange is a highly regulated process. It ensures that globally-respected standards of investor protection and corporate governance are applied by the company.
Why bulls and bears?
When stockmarkets trend up and prices are rising, it’s dubbed a bull market. When the trend is down and prices are falling, it’s a bear market.
The origins of this bit of financial slang aren’t clear, but could be down to the fighting styles of the two animals. When a bull attacks, it rears its horns upwards. By contrast, a bear swipes down on opponents with its paws.
These companies must publish audited accounts and other information about their activities. This helps investors make realistic assessments about the shares being traded. The aim is to banish dodgy accounting or other malpractice that might mislead people into thinking a company is worth more, or less, than it really is.
When a company is first listed on an exchange, its shares are sold directly to investors in an Initial Public Offering (IPO). This forms the so-called primary market for the shares. Trading then starts between investors in secondary markets, supported by stock exchanges.
Stockmarkets disclose share prices publicly – so they are transparent to everyone – and update these prices throughout the working day as trades occur.
What is a stockmarket index?
An index measures the value of a stockmarket. These indices are mathematical formulas which sum up the price movement of their component parts. The component parts are individual company stocks.
Often quoted in the news, indices are useful shorthand for describing broad market movements. They are also an important tool for investors because they are used as benchmarks. The performance of financial products can be measured by comparing it against a benchmark. The index stands in for the ‘market average’ – which is something that active fund managers aim to beat.
Be aware that a regular index doesn’t usually take account of dividends, unless it’s labelled Total Returns. This is significant. The two may differ widely over the long run because dividends are an important component of investment returns.
What’s the FTSE?
Arguably, the best known index in the UK is compiled by the Financial Times. Its so-called Financial Times Stock Exchange 100 Index tracks the 100 biggest companies, by value, on the London Stock Exchange. It is commonly referred to as the FTSE 100, or simply “the FooTSiE” (as in FTSE).
Back in 1983, the collective value was arbitrarily fixed at 1000 as a reference point. Since then, any changes in the underlying share prices have been reflected in the index’s price. So, when the share prices of the top hundred companies got three times bigger on average than they had been in 1983, the FTSE 100 hit 3000 points (3 x 1000). This happened in the mid-1990s.
The companies that make up the FTSE 100 changes over time. Of the 100 names that featured when the index started, only 23 remained 30 years later.
The FTSE 100 is by no means the only index. There are hundreds of them – not just in the UK, but around the globe. As one might expect, the FTSE All-Share tracks every company listed on the London Stock Exchange. Over in the US, the most famous ones are the Dow Jones, S&P500 and NASDAQ Composite. In Japan it’s the Nikkei. And so on.
FTSE All-Share index (1962 to 2013)
There is little consensus among scholars as to when corporate stock was first traded. Some see the key event as the Dutch East India Company's founding in 1602...