I like to play squash, keep fit and have an interest in the stockmarket. I hope you enjoy reading my...
I like to play squash, keep fit and have an interest in the stockmarket. I hope you enjoy reading my opinions if you are here.
Member since:09.05.2001
Reviews:27
Members who trust:7
Using a trading strategy I have been investing in the FTSE 100 index for the past 9 months. Personally I think the FTSE 100 index is a good place to invest for stockmarket novices and veterans alike. There are many different products that allow you to gain some kind of exposure to the index, which is made up to the 100 largest companies in the UK.
In this review I will cover the following in regard to the FTSE 100 index:
- What is the FTSE 100 index and what are the main constituents - Products that can be used to trade in the FTSE 100 index - Methods for trading in the FTSE 100 index - My personal view on the current value of the index
What is the FTSE 100 index and what are the main constituents
The FTSE 100 index is like a barometer that is used to measure the value of the top 100 companies listed on the London Stock Exchange. When you invest in a product linked to the FTSE 100 index you will be buying a proportion of the 100 companies that make up the index. Each company contained within the FTSE 100 is given a percentage weighting depending on its Market value or market capitalisation (this figure is the total number of shares listed multiplied by the share price). As a result of this the larger the market capitalisation of the company the larger the percentage of FTSE 100 index it takes up. Currently the largest company within the FTSE 100 index is the Oil giant BP.
Listed below are the top 10 companies contained within the index (information taken from www.ishares.net):
The total percentage of the FTSE 100 index made up of these 10 companies is 51.46%; the other 90 make up 48.54%. When you invest in the FTSE 100 index you have to be prepared to accept that the share prices of these 10 companies have a great deal of influence on the value of your investment. It doesn't bother me, but 51.46% might be too concentrated for some people. With the companies BP and Shell making up almost 19% of the index at the moment, it is very sensitive to oil prices. Recently the FTSE 100 index reached a 3-year high; this was partly caused by the increase in the price of oil and the resultant increase in the share prices of BP and Shell.
I don't think the FTSE 100 index is a good place to invest if you are very concerned with ethics. The top 10 companies are Oil, Pharmaceuticals and Banking, which could be considered to have dubious ethical practices by some (if you ask me ethics is a real grey area when investing).
Products that can be used to trade in the FTSE 100 index
There are many different types of financial products that can be used to gain exposure to the FTSE 100 index. However I have decided to focus on the two that I think are most suitable for the average small investor. These products are Unit Trust/OEIC trackers and Exchange Traded Funds (ETF's).
These products are offered from fund management and insurance companies. Every time you invest in a unit trust or OEIC tracker new units/shares are issued and the size of the fund increases. (I think there are some opinions on Unit Trusts by other Ciao members in the Member Advice section if you want further details).
It makes sense when buying a tracker to try and pay the lowest possible charge, as tracker funds are very cheap to manage and all do the same thing. Tracker funds are also known as passive funds rather than active funds. The reason for this is they don't require a fund manager to make decisions on what is in the fund as they are just replicating the FTSE 100 index. Tracker funds are usually managed by an in house computer system.
As I use EFT's to invest in the FTSE 100 index I don't have any unit trust/OEIC trackers. However I have taken a look in at these types of tracker in the past and I like the companies Legal & General and Fidelity. With Legal & General you can invest as little as £50 a month into a tracker through a savings plan, the UK 100 index has no initial charge or exit charge and an annual management charge of 0.75%. This means if you pay the minimum of £50 a month into the plan for 1 year, you will end up putting £600 into the fund and it will only cost £4.50 to manage every year. However the dividend yield (income paid out as cash) on this tracker is only 1 % whereas the actual yield on the FTSE 100 is around 3%. Legal & General also offer a UK Index trust that tracks the FTSE All-Share index; the annual charge is even less at 0.50% a year and the yield is 2.46%. Like the 100 index the FTSE All-Share is still dominated by the top 10 companies, but it encompasses the whole stockmarket. Because the FTSE All-Share is more diverse it is less volatile than the FTSE 100. Legal & General also offers tracker funds tracking major stockmarket indices in other countries and geographical areas such as the US, Japan and Europe.
Fidelity also offers an All-Share tracker known as the MoneyBuilder UK Index fund. The annual management charge on this is even less at 0.30%, in fact it is currently the lowest costing tracker on offer in the UK. The dividend yield on this fund is 2.24%.
The websites for these two firms are:
www.legalandgeneral.co.uk
www.fidelity.co.uk
Exchange Traded Funds
Exchange Traded Funds (ETF's) are the way I choose to invest in the FTSE 100 index. Unlike unit trusts these products are traded on the London Stock Exchange. Also unlike unit trusts/OEICS, which have the price, revised once a day the price continuously is revised throughout the day like a share in a real company. For this reason ETF's are a much more flexible way to invest in the FTSE 100 than unit trusts/OEICS. If you want to buy shares in an ETF you need to have a stockbroker, preferably an online broker like Squaregain (formerly known as Comdirect). I use Squaregain and I can highly recommend them. ETF's are more of a traders tool, I don't think they are suitable for someone who wants to save between £50 to £200 a month as the dealing costs would have more of an impact on your investment. The minimum I personally invest in ETF's with every trade is £500, but I think you can go as low as £250 without dealing costs having too much of an impact.
ETF's are relatively new to the UK; the first ETF the iFTSE 100 was launched in the year 2000. The company responsible for ETF's in the UK is Barclays Global Investors (BGI), all the ETF's run by BGI have been given the ishares brand. Currently I only trade in the aforementioned iFTSE 100 (symbol - ISF), however there are Pan European, US, Japanese, Fixed Interest and even Chinese ETF's on offer.
The annual charge on the iFTSE 100 is only 0.40% and the dividend yield almost the same as the FTSE 100 at 2.9%. Using Squaregain I pay £12.50 every time I trade, because ETF's are actually based in Ireland there is no stamp duty to pay on them (unlike every other share on the stockmarket) which helps to reduce trading costs. You might know of a stockbroker with lower dealing fees than Squaregain, but I like the top quality service offered by Squaregain.
Relevant ETF websites include:
www.squaregain.co.uk
www.ishares.net
Methods for Trading the FTSE 100 index
I quite often talk to people about investing in the stockmarket and many of them complain about losing money. When I first started investing in the stockmarket like them I either lost money or didn't make much of a profit. I have learned over the years that a lot of success on the stockmarket is down to how you invest rather than what you invest in. When I started out I thought investing was a simple case of selecting an investment, putting in a lump sum then watching your profits roll in. If you have a long-term horizon I think that if you select a good investment, monitor it every now and then and hold it this is perfectly acceptable. However, from my own experience I have learnt that sometimes it isn't a good idea to invest a lump some in one go. Back in 2002/2003 when markets were extremely choppy many of my long-term investment were showing losses. I had the idea of splitting a lump sum up to take advantage of the turbulent markets; I had also seen the company Fidelity offering an option called 'Phasing' (Fidelity seem to be quite innovative in investment). Carrying out this 'Phasing' method to invest a lump sum allowed me to take advantage of market conditions throughout 2003 and 2004, as a result my investments from this period made comfortable profits. I then decided to try 'Phasing' using the iFTSE 100 ETF. I made a plan on a spreadsheet of how I would invest a certain amount into the iFTSE 100 every month whatever the market conditions.
Below is a scenario that I have thought up that demonstrates how 'Phasing' a lump sum into a choppy FTSE 100 using the ETF can reduce losses and even lead to profits. (These figures have been made up just for demonstration).
JANUARY 2006 - 5000 FEBRUARY 2006 - 4800 - LOST 4.00% MARCH 2006 - 4700 - LOST 2.08% APRIL 2006 - 4450 - LOST 5.32% MAY 2006 - 4550 - GAINED 2.25% JUNE 2006 - 4675 - GAINED 2.75% JULY 2006 - 4750 - GAINED 1.60%
The figures in this example are the month of investment, value of the FTSE 100 index and percentage change on the month.
The value of £10,000 invested as a lump sum in January 2006 at the end of the 7-month period in July 2006 would be £9,500, or a 5% loss.
However divide your £10,000 by 7 into £1428.00 and you get a different result.
JANUARY 2006 - £1428 FEBRUARY 2006 - £2798.88 MARCH 2006 - £4168.57 APRIL 2006 - £5374.83 MAY 2006 - £6923.62 JUNE 2006 - £8541.83 JULY 2006 - £10106.86
Investing £1428 per month and using the percentage changes in the FTSE 100, you actually get a small profit rather than a 5% loss. This profit is less after dealing costs, for example Squaregain at £12.50 a trade would equate to total costs of £87.50, subtracting £87.50 from £106 gives a profit of £18.50. This is better than a £500 loss and you might have more profit after receiving dividends.
The best thing about this method is that in reality it is flexible. You don't have to invest every month; you could extend the time period and invest on a quarterly basis. You also don't have to invest the same amount every time; you could invest half the amount in the early months and double up in later months increasing profits.
If you don't have a lump sum but are investing smaller amounts (e.g. £50 a month into a unit trust) you will also get an averaging of the buying price. This effect is known as pound cost averaging.
My Personal View on the Current Value of the FTSE 100 index
I think there is a saying that goes something like "Only fools and liars can tell you exactly what will happen on the stockmarket in the future". I can't predict what will happen to the FTSE 100 index in the next week let alone the next year. However I do think there is currently still some good value in the index and it has the potential to move upwards. At the time of writing in October 2005 the FTSE 100 has fallen 6% since its peak of 5500 at the end of September. Now the index is around 5150, this 6% fall could be just a temporary blip; there could be some recovery to profit from.
(There are some charts of the FTSE 100 that can be viewed on Squaregain.)
I can see why this received a diamond, some really useful info there and explained in a straightforward way. Well done. I am a fan of Fidelity, esp their tracker funds (which have outperformed my "managed" fund bah).
mo79 25.11.2005 15:47
That was absolutely detailed. Well done!
arnoldhenryrufus 24.11.2005 16:16
Although I would be totally lost when it comes to investing, your review guides one in the right direction, some brilliant info there - well done - lyn x
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