How to read the financial pages

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12. Indices

In the stock market, an index is a device that measures changes in the prices of a basket of stocks, and represents the changes using a single figure.

The value of an index is that it gives you an immediate feel for how a group of shares are performing day by day, and how they have performed historically. Click here for a chart showing the movement of the FTSE 100 between 1995 and 2000.

The 'Footsie' is calculated by taking the average of the share prices of the largest 100 companies on the London Stock Exchange by market capitalisation. It was launched in 1984 with a base figure of 1,000, and tends to fluctuate between the 3,000-6,000 range.

The performance of the Footsie is reported on television, radio, websites and in the newspaper every day. You can't miss it. But it's not the only index. The others are:

FTSE Actuaries All-Share:	the 800 leading companies and investment trusts on the LSE
FTSE MID 250:	the next largest 250 companies
FTSE A 350:	combination of FTSE 100 and FTSE 250
FTSE Smallcap:	the remaining companies listed in the FTSE Actuaries All-Share index
FTSE A Fledgling:	companies too small to qualify for the FTSE All-Share
FTSE AIM:	companies trading on the Alternative Investment Market
TechMark:	index of companies primarily involved in technology

The movements of the indices above, as well as a whole host of other indices to do with international finance, are reported daily in the Financial Times, in other national newspapers, and in all the investment magazines.

Why are Indices useful?

Well, as mentioned, they give you an immediate glimpse of how the market, or a particular sector of the market, is doing.

But they have another very important function, which is to help you assess how well you are doing as an investment manager. Remember that performance is all comparative.

If your investments made an 8% return in a year, and the rest of the market made 12%, you've underperformed.

If your investments made a 4% return in a year, and the rest of the market has made 2%, you've outperformed the market.

Indices tell you what 'the rest of the market' has achieved. They are benchmarks against which you should measure your own, or your fund manager's, stockpicking ability.

If you consistently underperform the index, think about getting a broker to advise you on stock selection, or invest in a unit or investment trust.

If you're already using an advisory broker, or investing in a unit trust, and they underperform the index, think about changing advisers, or switching into a tracker fund. Trackers funds invest in the component companies of an index and are bound, therefore, to do as well as the index. They also have low charges.

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