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Last Updated: Friday, 27 January 2006, 10:14 GMT
How the FTSE is calculated
Adam with share certificate
A third of the value of the FTSE100 is concentrated in just five shares
The stock market is about winners and losers.

When you look at a list of the companies in the FTSE 100 (sometime called the 'footsie') it looks like a list of equals.

They all share the joy of being among the top 100 biggest companies on the London Stock Exchange.

But within the FTSE 100, the companies are very different sizes. And size buys influence.

The larger the company the more weight it is given in the Index.

Market Cap

Size is measured by market capitalisation. That's the value of all the shares added together.

The larger the market capitalisation the bigger its percentage of the index.

For instance, oil giant BP is our most valuable company. It is worth 135.9 billion which represents 9.5% of the total value of the FTSE 100.

Next comes bank HSBC, which is worth 104.8 billion and is 7.3% of the index.

Drug company Glaxo has a market capitalisation of 83.9 billion and is worth 5.9% of the FTSE 100.

Number four is Vodafone, the world biggest mobile phone company. It's currently worth 73.3 billion, making up 5.2% of the index.

Weighting

And because they all have varying weights in the index, a change in the share price of one company can have more of an effect than the change in another.

Because BP is such a big company, a 1% change in its share price leads to 5.4 point change in the FTSE.

A similar movement in the smaller Vodafone, however, would translate into a 2.9 point change in the overall index.

And as certain sectors, such as banking and oil, are over-represented in the FTSE index, when they sneeze the FTSE gets a cold.

Changes are calculated in real time, so the FTSE moves up and down continually as the prices of its constituent stocks change.

Trackers

All this is more than of passing interest.

It helps you understand the mechanics of the market but it also highlights a problem with some investments.

Some tracker funds invest across the 100 shares in the FTSE 100, or perhaps all the shares in the FTSE All Share Index.

What a lot of shares there are and what a great way to spread the risk you might think.

But because of the different weighting of shares, it is not as widespread as it looks at first glance.

For instance, a third of the whole value of the FTSE 100 is concentrated in the top five shares.

So a big fall in just those five shares can have a very dramatic effect on your investment, even if nothing all at is happening to the other 95 shares.


ADAM'S STOCKMARKET BASICS
 

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