finance

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 The FT30 has been superseded in importance by the FTSE-100.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 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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