FTSE-100 Index

[squirtyflower]

This is why I have never understood economics and still don't. I've read a couple of books that SWP's Back pointed out to me a few years back and I even did Economics at GCSE (for which I received the wonderful grade of G on a report once) and it isn't any clearer to me.

There doesn't seem to be any consistent rules for which you can work within. Nothing makes any sense and if you have no consistent rules or even a consistent logic then there's nothing to work with. It is essentially magic. Due to the fact that actual mathematicians and clever people both understand it and work within it, I can only presume that it's something that I still am fundamentally ignorant over.

There has to be some sort of predictive basis to it

Caps lock off

There isn't
I just follow a very simple rule, which I read about in the 90s and my portfolio is now 6x greater than it was

You don't happen to sell this in mass-emails do you?

And I just can't accept that it's woo. Whole economic systems are based on these theories and there must be evidence, even small amounts, to support each idea. People can't just be making up shit from the top of their heads, we must be oversimplifying.

I sell nothing except my expertise, to my employer, who sometimes sub contracts it out to others

 

[Damocles]

Do you bring your own condoms or is that the clients responsibility?

 

[Gelsons Dad]

This is why I have never understood economics and still don't. I've read a couple of books that SWP's Back pointed out to me a few years back and I even did Economics at GCSE (for which I received the wonderful grade of G on a report once) and it isn't any clearer to me.

There doesn't seem to be any consistent rules for which you can work within. Nothing makes any sense and if you have no consistent rules or even a consistent logic then there's nothing to work with. It is essentially magic. Due to the fact that actual mathematicians and clever people both understand it and work within it, I can only presume that it's something that I still am fundamentally ignorant over.

There has to be some sort of predictive basis to it

Caps lock off

There isn't
I just follow a very simple rule, which I read about in the 90s and my portfolio is now 6x greater than it was

Should have bought big tobacco ;-)

 

[squirtyflower]

This is why I have never understood economics and still don't. I've read a couple of books that SWP's Back pointed out to me a few years back and I even did Economics at GCSE (for which I received the wonderful grade of G on a report once) and it isn't any clearer to me.

There doesn't seem to be any consistent rules for which you can work within. Nothing makes any sense and if you have no consistent rules or even a consistent logic then there's nothing to work with. It is essentially magic. Due to the fact that actual mathematicians and clever people both understand it and work within it, I can only presume that it's something that I still am fundamentally ignorant over.

There has to be some sort of predictive basis to it

Caps lock off

There isn't
I just follow a very simple rule, which I read about in the 90s and my portfolio is now 6x greater than it was

Should have bought big tobacco ;-)

BAT big enough for you?

 

[SWP's back]

I am fucking terrible with economics so someone is going to have to explain this to me. Why is it now reaching an all time high? Was it moving in that direction before the crash? Have we done something right or not done something wrong?

What's the good and bad news here?

It should, and has, always increased over time, like any index of leading shares should.

The FTSE is just an index of the 100 largest companies, with a registered head office in the UK, by market capitalisation (ie number of shares x share price).

As some companies fall, others replace them. As GDP is always on the rise (with the exception of recessions etc) then an index should always rise, over the long term.

The fact it is back at an all time high should be no surprise as the economy (in terms of GDP) is very close to where is was pre-crash.

Historically and by that I mean of several generations, the FTSE has averaged around 5-9% growth per year (with a dividend yield of 2-3% on top of that).

 

[SWP's back]

Is it not more to do with interest rates for savers being so low that the stock exchange is being seen as a better place to invest

No. I a word.

The vast majority of investors are pensions funds, not Dave from the pub with his £10k ISA.

 

[Damocles]

How can consistent economic growth over the long term be supported by the market?

Surely there will be a time, even if it's only theoretical, where a company can only grow to a certain share price and demand? Thus over the very long term there will be 100 companies with their highest share price trading off short term consequences which result in a lower price with others who are experiencing higher than valued growth?

So why doesn't the FTSE eventually reach an equilibrium, or is this just something that hasn't happened yet and won't on a normal timescale?

 

[SWP's back]

How can consistent economic growth over the long term be supported by the market?

Surely there will be a time, even if it's only theoretical, where a company can only grow to a certain share price and demand? Thus over the very long term there will be 100 companies with their highest share price trading off short term consequences which result in a lower price with others who are experiencing higher than valued growth?

So why doesn't the FTSE eventually reach an equilibrium, or is this just something that hasn't happened yet and won't on a normal timescale?

You have it the wrong way round. The market is supported by consistent economic growth.

The main reason why a share price increases is that that share is likely to pay a decent dividend.

Bare with me here as I'm pissed and on my phone.

So company A has a share price of 100p and releases a dividend of 7p.

Company B has a share price of 200p and release a dividend of 7p.

[Assuming everything else is the same etc as there are so many variables]

Investors would look at the two companies and prefer to buy company A as their dividend is 7% of cost of the share compared with 3.5% at company B. This then pushed up the share price of company A until they reach and equilibrium, which would happen very quickly and may involve the share price dropping of company B.

Now the economy does well let's say in the next year and both companies increase their profits as consumers are buying their profits.

This means they can share that wealth with investors (shareholders) again and the share price again rises and more people buy (the limited number of) shares available to benefit from these increased profits.

This is why companies like Apple continue to rise, as they made record profit after record profit and pass that profit, after investing in its own future, to its shareholders.

Now as an index is a collection of the top shares, by its very nature, it has the success stories and if a company does crap over the long term, it loses its place (like relegation from the league) and a new company that is better managed/better equipped to address the needs of the consumer, replaces it.

As an example, the week Woolworths went out of business, The Pound Shop released record profits.

So long as GDP increases, there will be companies making record profits, new industries are built and replace the old industries that fall by the way side, but the index will continue to rise, over the long term.

Squirts is sort of correct, market sentiment accounts for very short term fluctuations, but long term it is driven by economic growth, entrepreneurs, new technology and innovation.

Think of it as being like a tide that only ever comes in, sure, there are waves that make the water go back and forth and water rises and recedes, but every time the rise, they go to a new high water mark, every time they recede, they don't quite reach the previous low point.

Any of that make sense?

 

[hilts]

How can consistent economic growth over the long term be supported by the market?

Surely there will be a time, even if it's only theoretical, where a company can only grow to a certain share price and demand? Thus over the very long term there will be 100 companies with their highest share price trading off short term consequences which result in a lower price with others who are experiencing higher than valued growth?

So why doesn't the FTSE eventually reach an equilibrium, or is this just something that hasn't happened yet and won't on a normal timescale?

You also have to throw in inflation to a degree, A company standing still will produce more profit if inflation is say 3% as there goods will be 3% more expensive, so in effect the ftse should grow unless there is a recession, also throw in the gambling/prudent forecasts as a company can make a big profit but the market expected the profit to be bigger/smaller

The UK seems a safer option at the moment due to increased GDP so guys who might invest elsewhere invest here

Also everything SWP said as i am pretty much guessing here

 

[Damocles]

How can consistent economic growth over the long term be supported by the market?

Surely there will be a time, even if it's only theoretical, where a company can only grow to a certain share price and demand? Thus over the very long term there will be 100 companies with their highest share price trading off short term consequences which result in a lower price with others who are experiencing higher than valued growth?

So why doesn't the FTSE eventually reach an equilibrium, or is this just something that hasn't happened yet and won't on a normal timescale?

You have it the wrong way round. The market is supported by consistent economic growth.

The main reason why a share price increases is that that share is likely to pay a decent dividend.

Bare with me here as I'm pissed and on my phone.

So company A has a share price of 100p and releases a dividend of 7p.

Company B has a share price of 200p and release a dividend of 7p.

[Assuming everything else is the same etc as there are so many variables]

Investors would look at the two companies and prefer to buy company A as their dividend is 7% of cost of the share compared with 3.5% at company B. This then pushed up the share price of company A until they reach and equilibrium, which would happen very quickly and may involve the share price dropping of company B.

Now the economy does well let's say in the next year and both companies increase their profits as consumers are buying their profits.

This means they can share that wealth with investors (shareholders) again and the share price again rises and more people buy (the limited number of) shares available to benefit from these increased profits.

This is why companies like Apple continue to rise, as they made record profit after record profit and pass that profit, after investing in its own future, to its shareholders.

Now as an index is a collection of the top shares, by its very nature, it has the success stories and if a company does crap over the long term, it loses its place (like relegation from the league) and a new company that is better managed/better equipped to address the needs of the consumer, replaces it.

As an example, the week Woolworths went out of business, The Pound Shop released record profits.

So long as GDP increases, there will be companies making record profits, new industries are built and replace the old industries that fall by the way side, but the index will continue to rise, over the long term.

Squirts is sort of correct, market sentiment accounts for very short term fluctuations, but long term it is driven by economic growth, entrepreneurs, new technology and innovation.

Think of it as being like a tide that only ever comes in, sure, there are waves that make the water go back and forth and water rises and recedes, but every time the rise, they go to a new high water mark, every time they recede, they don't quite reach the previous low point.

Any of that make sense?

No. But I'm going to have to think about it a bit more and come back with some possibly pertinent questions. I'm mainly confused why this is used as a metric that people should be pleased with if the growth is built into the system. And I'm still not sure why that is.

Let me come back to you.

 

[SWP's back]

How can consistent economic growth over the long term be supported by the market?

Surely there will be a time, even if it's only theoretical, where a company can only grow to a certain share price and demand? Thus over the very long term there will be 100 companies with their highest share price trading off short term consequences which result in a lower price with others who are experiencing higher than valued growth?

So why doesn't the FTSE eventually reach an equilibrium, or is this just something that hasn't happened yet and won't on a normal timescale?

You have it the wrong way round. The market is supported by consistent economic growth.

The main reason why a share price increases is that that share is likely to pay a decent dividend.

Bare with me here as I'm pissed and on my phone.

So company A has a share price of 100p and releases a dividend of 7p.

Company B has a share price of 200p and release a dividend of 7p.

[Assuming everything else is the same etc as there are so many variables]

Investors would look at the two companies and prefer to buy company A as their dividend is 7% of cost of the share compared with 3.5% at company B. This then pushed up the share price of company A until they reach and equilibrium, which would happen very quickly and may involve the share price dropping of company B.

Now the economy does well let's say in the next year and both companies increase their profits as consumers are buying their profits.

This means they can share that wealth with investors (shareholders) again and the share price again rises and more people buy (the limited number of) shares available to benefit from these increased profits.

This is why companies like Apple continue to rise, as they made record profit after record profit and pass that profit, after investing in its own future, to its shareholders.

Now as an index is a collection of the top shares, by its very nature, it has the success stories and if a company does crap over the long term, it loses its place (like relegation from the league) and a new company that is better managed/better equipped to address the needs of the consumer, replaces it.

As an example, the week Woolworths went out of business, The Pound Shop released record profits.

So long as GDP increases, there will be companies making record profits, new industries are built and replace the old industries that fall by the way side, but the index will continue to rise, over the long term.

Squirts is sort of correct, market sentiment accounts for very short term fluctuations, but long term it is driven by economic growth, entrepreneurs, new technology and innovation.

Think of it as being like a tide that only ever comes in, sure, there are waves that make the water go back and forth and water rises and recedes, but every time the rise, they go to a new high water mark, every time they recede, they don't quite reach the previous low point.

Any of that make sense?

No. But I'm going to have to think about it a bit more and come back with some possibly pertinent questions. I'm mainly confused why this is used as a metric that people should be pleased with if the growth is built into the system. And I'm still not sure why that is.

Let me come back to you.

Well they shouldn't be too arsed about it really.

Other than to say if the markets are doing well then that's usually a symptom of the high street/economy doing ok.

A market fall usually precedes a recession by 6-12 months as a rule as people/funds pull their money out in a flight to safety (usually bonds).

 

[KenTheLandlord]

Lol at the communist being jealous at other people's fortunes. Anybody can buy and sell shares, just like those who choose to use bonds or ISAs, it's just a lot more volatile. You snooze, you lose. Nothing to do with "the elite".
.

I assume this is aimed at me.

You are a fucking wierdo obsessive.

I think the irony is that the rich elite have become the communists and are sharing the wealth, equally and between themselves.

The poor meanwhile have had to become dog eat dog capitalists and are now entrenched in their own fight for something more.

Its a queer old world.

 

[roaminblue]

No. But I'm going to have to think about it a bit more and come back with some possibly pertinent questions. I'm mainly confused why this is used as a metric that people should be pleased with if the growth is built into the system. And I'm still not sure why that is.

Let me come back to you.

SWPs back is definitely the authority on this, but I can offer my tuppence.

In short, the FTSE100 isn't necessarily a good indicator for economic health. There are a lot of different actors at play within the FTSE100, there are different type of investors, there are a lot of different companies with global operations. The ftse300 may be a better indicator, but to be honest the correlation isn't as strong as it is in other countries.

That said, one of the main considerations within the financial market, and economics in general, is confidence. There is a reason why people are worried about deflation even though oil prices are going down.

Take for example, the credit markets. In 2007/2008 leverage was widely adopted and invested within. This is despite the cost of debt being as high as it ever has been. The reason was debt investors were confident of returns, companies were confident in a growing economy and being able to pay the debt down. We all know what happened next.

So. At a basic level, a company's market valuation is a function of its future cash flows discounted to the present, or conversely from an investor's point of view, it is the discount of its future dividend payments.

This is important. If an investor perceives that a firm's cash flows are going to grow, it will assign a higher value. Greater cash-flows potentially mean greater dividends.

How do investors assess a company's potential growth? Usually through historic analysis, considering the business operations, the management, its geographic segment; of course there are brokers reports that do a lot of that for you.

THis can become self fulfilling in a way. As a firm's market cap grows it is able to do a number of things that would make it more attractive. It could potentially fund growth through more leverage, it could raise more equity or to fund an acquisition.

Now when you look at this relationship, an overall increase in the index can be seen as an overall increase in investors confidence in the companies domiciled within the UK. This in turn can help boost growth as firms seek to increase earnings, which in turn can increase the stock price.

 

[Hamann Pineapple]

Is it not more to do with interest rates for savers being so low that the stock exchange is being seen as a better place to invest

No. I a word.

The vast majority of investors are pensions funds, not Dave from the pub with his £10k ISA.

Bloody Dave, I wish I hadn't bought him them peanuts now.

 

[Prestwich_Blue]

The theory is as SWP's Back says. The price of a share should, all things being equal, be a function of the dividend. But a number of other factors come into play, principally risk.

Dividends can only be paid out of profits so investors would take a view on the company's ability to maintain the profit and cash flow that will enable a steady dividend to be paid. Two companies paying the same dividend should have different share prices if what's known as the "quality" of the companies' earnings were different. One producing consistent profits based on their normal operations should have a higher share price than one whose profits vary significantly from year to year or rely on exceptional or extraordinary items.

Price can also depend on the economy in general. Low interest rates should mean higher share prices as the yield will be lower. If interest rates are 1% and a share pays a rock-solid 10p per year dividend, then the share price should be around £10 in theory, as 10p is 1% of £10. If interest rates rise to 5%, then in theory the share price would go down to £2, as 10p is 5% of £2.

A share price may reflect future anticipated events, so a housebuilder's shares may increase in price if there's a feeling that house prices are going to rise or the government is going to sanction something that will encourage new building. Mining shares may rise if the price of raw materials is going up. And vice versa of course. A report that that Aldi & Lidl are gaining market share at the expense of Tesco & Sainsbury's will impact those latter shares negatively. The PPI scandal and financial crisis destroyed bank shares.

It's also about supply and demand, so the more the market makers think a share will be in demand, the higher the price they'll set. If there are more sellers than buyers, they'll reduce the price to attract buyers and discourage sellers. Also general sentiment may affect all shares. Feelgood factors will see across the board price rises.

Even if a company doesn't pay a dividend, there could be an opportunity for capital appreciation. If a company is sitting on potentially valuable land then this could impact the share price, even if its core operations are unprofitable.

 

[west didsblue]

In answer to my own question in the OP I believe the index has some way to go before a it heads south. Looking at long term trends I reckon it's about where it should be, unlike the last time it was at this level in 1999. At that time it was artificially inflated by dot com companies who investors mistakenly believed had huge growth potential. What they didn't realise was that established companies had started to use the internet too and would quickly provide competition online which would inevitably bring these new companies back to earth. The companies that comprise the FTSE 100 today are primarily companies with track records with long term prospects for growth so any future downturn will be a lot less severe than the 50% decline between 1999 and 2003. I reckon the market will continue to rise for a couple more years before it will inevitably go down. Having said this my predictions are usually wrong.

 

[west didsblue]

Over 7000 for the first time ever.

 

[worsleyweb]

Brilliant news. I went shit or bust on the ftse 100 in 2008. Been a fantastic few years bouncing back.

 

[NeilYoungIsBack]

I am fucking terrible with economics so someone is going to have to explain this to me. Why is it now reaching an all time high? Was it moving in that direction before the crash? Have we done something right or not done something wrong?

What's the good and bad news here?

The FTSE100 is dominated by companies that earn the majority of their revenue from non-UK markets, so the goods news is more likely to be what is happening elsewhere in the world.

 

[west didsblue]

In answer to my own question in the OP I believe the index has some way to go before a it heads south. Looking at long term trends I reckon it's about where it should be, unlike the last time it was at this level in 1999. At that time it was artificially inflated by dot com companies who investors mistakenly believed had huge growth potential. What they didn't realise was that established companies had started to use the internet too and would quickly provide competition online which would inevitably bring these new companies back to earth. The companies that comprise the FTSE 100 today are primarily companies with track records with long term prospects for growth so any future downturn will be a lot less severe than the 50% decline between 1999 and 2003. I reckon the market will continue to rise for a couple more years before it will inevitably go down. Having said this my predictions are usually wrong.

Looks like only the last sentence in my post was correct. The index has dipped below 6000 today, exactly 6 months after it went above its New Years Eve 1999 record high.