Ever sat and watched the news and wondered what on earth the FTSE index is? Okay, so you haven’t. But for those of you that have this article is for you. the Ftse is an example of a stock index, but what are stocks?
The stock market
Basically, the stock market is a globalised market place where people trade in virtual goods known as securities. The most popular of these securities are called shares. But if you don’t know what a share is that information is probably not very helpful. So let’s take a look at what a share is.
A share is very basically owning a small portion of a business. The value of all the shares is effectively the value of the business. Each share is worth exactly the same amount of money. If you think of a company being a cake. The more valuable a company is, the bigger the cake, therefore the more you get in each slice (IE the slice is worth more)
Buying and selling
Imagine you brought your share for a pound and a lot of other people buy shares and so the value rises to two pounds. If you were to sell your share now you would have made a pound profit. But then if you do that and the shares rise up to £4 then you have missed an opportunity. It is for that reason that the stock market involves a lot of risks.
The value of shares
Make no mistake about it stocks are lucrative. The total worth of the shares on our planet is worth a staggering 60 trillion a year. That is more than the cumulative amount of all the goods and services on our planet.
How shares effect businesses
The reason that businesses float themselves on the stock market is to generate profit. If a board of directors puts their company on the stock market they may make, for argument’s sake 25% of the company available for purchase. When those shares are sold the company can use the money made from them to expand and grow, which in turn often increases the value of the shares.
Why does the price of shares change?
The values of shares can change dramatically and over a short period of time. It is for this reason people who trade stocks and shares for a living can become very wealthy, very quickly. However, there is an element of chance involved. Share prices can go down just because of a nasty rumour.
New businesses and bubbles
Sometimes when a new business gets floated on the stock market people invest heavily in it driving its share prices upward. Sometimes the business will use this money in order to invest in the business to help it reach the potential that its investors hoped it would fulfil. Unfortunately, this is not always the case and the bubble can burst, causing the share price to drop rapidly.
So what exactly is being traded?
Well, effectively nothing. Unlike in a regular market where you may exchange money for say an apple. In the stock market, you are exchanging money for a virtual portion of a company. You don’t get anything physically. Although as a stakeholder you do get a say. Admittedly if there are a million shares and you own just one, you don’t have a massive say, but votes will involve shareholders.
You still haven’t told us what the FTSE is yet
Oh yeah! Basically, the FTSE is a stock index. The FTSE 100 is used to record the top 100 stocks on the London Stock Exchange. How well those top 100 stocks are doing gives a pretty good indication of the UK’s economy. Each country has it’s equivalent, for instance in Germany they have the Dax 100, in the US Nasdaq.