Session 4 Stock Market Indices & Importance
What Is a Stock Market Index?
A stock market index measures the performance of a group of stocks, representing a specific market or sector.
Think of an index as:
📊 A thermometer for the stock market
Instead of tracking hundreds of individual stocks, an index gives you a quick snapshot of how the market (or part of it) is doing.
Examples of what indices track:
Overall market performance
Large companies vs small companies
Specific industries (technology, banking, energy, etc.)
Why Are Stock Market Indices Important?
✅ Understand Market Direction
Is the market going up, down, or sideways?
Are stocks generally gaining or losing value?
✅ Compare Performance
Compare a stock or portfolio against the market
“Did my investment beat the index?”
✅ Guide Investment Decisions
Many funds (ETFs, index funds) are built to track indices
Long-term investors often use indices as benchmarks
✅ Track Economic Health
Strong indices often signal economic growth
Falling indices may reflect uncertainty or slowdown
Example: Key Stock Market Indices in London
1. FTSE 100
Tracks the 100 largest companies listed on the London Stock Exchange
Includes global companies like banks, oil firms, and consumer brands
Often used as a benchmark for the UK stock market
📌 Example companies: HSBC, Shell, Unilever
2. FTSE 250
Tracks the next 250 largest companies after the FTSE 100
More focused on UK-based businesses
Considered a better indicator of the UK domestic economy
📌 Often more volatile than the FTSE 100
3. FTSE All-Share Index
Represents almost the entire UK stock market
Combines large, mid, and small-cap companies
Used to measure overall market performance
📌 Covers about 98% of the UK market capitalisation
