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:

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.

1. What are the financial pages? 2. What to look for 3. Business news 4. Share prices in newspapers 5. Investment trust prices 6. Share prices on the internet and television 7. Commentary on share price movements 8. Anticipating company results 9. Finding company results 10. Interpreting company results 11. Takeovers and mergers 12. Indices 13. Sectors 14. Directors dealings 15. Unit trust information 16. Government bonds 17. Corporate bonds 18. Economic data - who needs it? 19. Key economic indicators 20. Conclusion

• How to Read the Financial Pages
• Eat The Rich