What on Earth is a stock index?


#1

The big indexes/indices (FTSE 100 etc) are probably the first bits of investing jargon we ever come across, but it’s easy to sort of know what they are without being clear on all the specifics.

So we thought we’d write up what an index really is and some of the background to them.

Let us know any favoured indices we didn’t mention!


#2

Nice write up. Potentially silly question incoming:

Dropping out of an index is serious business for companies, as when it happens, the relevant passive funds will sell out of that company. That can mean a big dive in the stock price!

Hypothetically, a company slips from FTSE100 to FTSE250 (eg to place 101). Then passive funds that track the FTSE250 will therefore buy that stock. Would that therefore cancel out the dive in stock price (or at least lessen the blow)? I suppose it would depend on the funds and their weightings…?

Has this kind of thing been seen before and are there any examples?


#3

Absolutely great question. You’re exactly right that the impact would depend on how much the new funds (eg FTSE 250) weight and how much money is in those new funds vs the old ones.

We actually had a good example in defence and rail services company Babcock recently. They got ousted from the FTSE 100 by Just Eat.

Also worth noting that sometimes an index won’t have a lower index for stocks to fall into. That can be painful.


(Denislav) #4

Thank you very much for the lovely article as always, Looking forward to the more detailed index tracking article

I have to say that being a company in the 99th place on the FTSE 100 most be keeping some people awake at night sometimes. :smiley:


(Matteo) #5

Thanks for again a great article!
I would like to point out a correction, Games Workshop now is in the FTSE 250 believe it or not. Actually I read an article about them like 2 months ago how it surprised many analysts that a company that produces tabletop wargames ended up in the FTSE 250.
This of course if we are talking about the same company :wink:


#6

Superb knowledge


#7

The company in 110th place apparently…



(Denislav) #8

Interesting to read! Thank you for sharing it! At least there is some thinking put into it and you cannot just drop out of he FTSE 100 without some type of warning.