Sometimes clients ask us: Should I invest in the FTSE? As is often the case, there isn’t one answer to that question. It depends on a number of things, but let’s start to explore this…
So, what is the FTSE?
The first thing to say is that there is a FTSE100, FTSE250 and a FTSE350.
The FTSE100 are very big corporates – the top 100 companies in terms of share value. Whilst their shares trade on the London Stock Exchange, hence they are entitled to FTSE100 status, they are not necessarily British companies, and can have bases across the globe.
In general, companies that are part of the FTSE100 are stronger performing, and therefore less risk. Although the stability of their share price can be influenced by events across the World, not just in the UK.
They often generate good dividends, which can provide you with an additional income each year.
The FTSE250 are, as the name suggests, the top 250 companies trading on the Stock Exchange. These companies tend to be a fairer reflection of business, with a broader range of sectors represented.
In terms of investment growth, there is an increased volatility, and they are more prone to the movement of the UK economy. In general, there are more UK based companies within this list. Many are still likely to be household names you will recognise.
And finally, the FTSE350 are the top 350 companies. This is a much wider range of companies, and there may well be names you have never heard of before. The investment is far more volatile, and can produce huge fluctuations dependent on a number of factors.
Whilst that means there is the opportunity to make significant gains, likewise there is a risk of considerable loss, if the share price falls sharply.
How can you earn from the FTSE?
In general, if a company does well they will pay out higher dividend payments. You will be entitled to those no matter which FTSE you have invested in.
Typically dividends are handled in one of two ways – either direct payment into your bank account, or the option to purchase further shares. Dividend payments into your bank are taxable, with the rate dependent on your other income streams.
If you have an equity product that is invested in the FTSE then your dividends are usually reinvested, so it grows even without you paying in extra money.
Naturally, you also earn if you sell shares for more money than it cost to purchase them, although share prices across the FTSE100 don’t fluctuate as much as those lower down the ranking.
So, should you invest?
The FTSE does provide diversification in your portfolio. We like clients to have a variety of investments, as it does spread their risk.
Equally, for clients who are interested in following their investments the FTSE does provide a level of excitement not always delivered by other products.
However, it does also depend on how risk averse you are. If you want absolutely no risk and cannot afford to lose money on any part of your investment then the FTSE is not the right place for you. If you are comfortable with risk then it can be a very rewarding investment, and an enticing one – particularly the FTSE350.
For individual advice on your particular circumstances and investment choices, please contact us on 01344 875 310.