Different Stock Market Indices

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The different Stock Market Indexes in the UK

  • FT 30. This is the oldest stock market index in existence. It came into existence in 1935. It is an index of the 30 biggest and most important companies listed on the stock market. It is not size alone that leads to inclusion. A cross section of firms has sought to be included in the index. It started with an index of 100 in 1935. All shares count equally, it is not weighted according to market capitalization. Therefore, it acts as a sensitive barometer to the mood of the market. List of FT 30 Companies
  • FTSE-100. The FT30 has been superseded in importance by the FTSE-100. ‘Financial Times, Stock Exchange top 100 list of companies. With 100 companies it gives a broader picture of the market sentiment. It is used as the ‘headline figure for the UK stock market. The FTSE-100 comprises 82% of market capitalisation. List of Companies in the FTSE-100

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Definition: Investment, Investor and Savings

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In economics, the definition of investment is quite strict. Investment means an increase in the capital stock – Gross fixed capital formation. Investment can involve The purchase of a larger factory The purchase of new automated machines to take part in the productive process. The purchase of new computers in a bank. The building of …

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Definition of Hedging

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Definition of Hedging – Setting up an investment positions which helps to protect against losses from a related investment.

For example, if you export goods to the US, an appreciation in the exchange rate can make your exports uncompetitive. Therefore, you can hedge against your position by buying Sterling futures. If sterling appreciates, your exports become uncompetitive, but you benefit from the rise in the value of Sterling.

When weighing up what to buy and where to invest some speculators may wish to hedge against risky investment.

A simple way to engage in hedging is to buy a safe asset for every risky asset. However, some people may want to hedge against a particular investment. This can be done by using derivatives.

Hedging with Put Options

An example is using a put option. This gives the owner the right, but not the obligation, to sell at a certain fixed price, before a certain date.

This means that if the share price falls more than the agreed price (striking price) then you can sell it.

Example, suppose you buy shares in ICI for 100p, hoping they will increase in value. To hedge, you could also take out a put option, which gives you the right to sell shares in ICI for 80p in the next 6 months. This means that if shares in ICI fall by 30%, the investor can sell at 80p.

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Police and Fire Services as Public Goods

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Q. Use economics and political theory to explain why the fire and rescue service should be provided by the state. I don’t want the answer….I just don’t understand what this means.

This revolves around a fundamental debate in economics – How much should the government intervene in the economy?

Ideally, goods and services would be provided in a free market without requiring any government intervention. Market provision is considered superior because there is less bureaucracy and more incentives for firms to be efficient.

However, there are some goods and services which will be under-provided in a free market. (Some goods may not be provided at all). This is considered a type of market failure and therefore for several reasons people argue the government should step in and provide it.

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Sticky Inflation

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Sticky inflation is an undesirable economic situation where there is a combination of stubbornly high inflation, (and often stagnant growth).   Sticky inflation is often associated with cost-push factors, i.e. factors which cause a rise in the inflation rate but also lead to lower spending and economic growth. Sticky inflation is also sometimes known as Stagflation …

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Will the US economy enter into Recession in 2008?

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Back in March I wrote this essay – Is the US heading towards recession?

According to some doom mongers the US is already in recession. They point to the ‘collapsing’ housing market and the rise in ‘repossessions’
The irony is that US economic growth has remained unexpectedly high at 4.9% in 3rd quarter of 2007. Growth has averaged over 2.1% since 2001 (US economic snapshots)

Unemployment remains at 4.5%, although this masks some disguised unemployment, – it is hardly the sign of a full blow recession.

Nevertheless there are several warning signs that could push the US into recession by the end of 2008

Why US Recession is Likely

House Price Fall.

US house prices fell by 4.5% in 2007. (In some cities they fell by more). Falling house prices reduces consumer wealth and consumer confidence; this will lead to lower spending. (Consumer spending has been the main driving force behind the US economy in recent years)
There are also concerns that the fall in house prices could accelerate due to the glut in house supply and the fact more people are coming to the end of cheap mortgage terms.

House Repossessions.

There has been a record rise in home repossessions. The foreclosure rate on homeowners has risen to a 17 year high of 5.59%.

Global Credit Crunch

Due to mortgage repossessions, especially on sub prime mortgages, banks have had to write off a lot of bad debts. This has caused an increase in the cost of lending. For example, 3 month dollar Libor spreads have jumped by 60 to 80 basis points in recent months.

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Imports – Exports and the Balance of Payments

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Readers Question: What counts as an import on the Balance of Payments?

Current Account measures trade in:

  1. Goods,
  2. Services,
  3. Investment incomes
  4. Net Transfers

A Debit on the credit account occurs when the UK imports goods and therefore money flows from the UK to oversees to purchase it. If debits are greater than credits the UK will have a current account deficit.

Examples of debits

  • UK consumers buy Chinese manufactured toys
  • UK consumers go on holiday to China
  • A Chinese firm in the UK sends back profits to China.
  • UK firms import raw materials from China.

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UK Unemployment in 2007 lowest for 22 years

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Amidst all the gloom surrounding global credit markets and house prices, it is easy to forget some of the strengths and developments in the UK economy. One of the most remarkable features of the UK economy is the sustained reduction in unemployment. Falling from a peak of 3 million in 1992, the official method of …

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