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A.steve

A Question About The Ftse100

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I've been wondering recently about the FTSE and how it might be influenced by nationalised banks.

As I understand it (on a superficial level) the FTSE100 is weighted by the size of company - so, for example, a 1% rise in the price of Vodafone would have a greater effect on the index than a 1% rise in some smaller company - say, Acme Telecom - if that were 'just' in the index. This makes (superficial) sense - since a 1% rise in the value of a massive company represents more wealth than a 1% rise in a tiny company.

What I'm wondering about today, however, is this: The likes of Lloyds and RBS are now majority state owned - do the indices take account only of the privately owned portion - or do they still consider the company as a whole irrespective of parts which are not owned by the private sector?

Should this alter our perception of the FTSE100 index? Are other indices worldwide subject to similar issues?

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As I understand it is

1. The current top 100 companies are based on last years top 100....

2. It it the share value of all these 100 companies.

Edited by moosetea

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As I understand it is

1. The current top 100 companies are based on last years top 100....

2. It it the share value of all these 100 companies.

Yes, I believe that too - my question is more specific... what, in the context of part-nationalised companies like RBS and Lloyds, is considered the "share value"? Is it the privately owned portion, or does it include the portion owned by the government?

I think this an interesting question - since, if the size of the whole company - irrespective of ownership - is what's used, then this means that any movement in the share price of RBS/Lloyds will have a direct leveraged effect on the FTSE100 that biases the index disproportionately in favour of illustrating them - from the perspective of a private investor, at least.

Edited by A.steve

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there are all sorts of adjustments aswell, for example, when a comapny raises more money through a rights issue, this is increases the size of the company, but the index is adjusted accordingly to allow for the new money coming in to the market.

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each point is worth about £250m

so if BP is worth say £100B they make up around 400 points on the FTSE.

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irrelevant who owns the shares.

I completely disagree. The index may take no account of who owns the shares, but - in the real world - it matters a lot if the shares are entirely owned by rational private sector investors, or if a sizeable proportion of the shares are owned by the state. It alters... to suggest otherwise would be akin to confusing housing equity with house prices.

each point is worth about £250m

so if BP is worth say £100B they make up around 400 points on the FTSE.

Handy rule-of-thumb, thanks. The interesting point, of course, is "worth". Where a sizeable proportion of a company is state owned, but where the state can't sell "right now", I'd argue that traditional "multiply the number of shares by the share price" doesn't work in establishing what a company is "worth".

Given the prevailing opinion that the index doesn't care if industries are state or privately owned - I can see an (apparently) important consequence:

Changes in (private sector) sentiment about the financial sector will have a disproportionate influence on the index value relative to other sectors.

I think that this will apply both to rises and falls in the index value... essentially, I predict that partial state ownership will lead to increased index volatility. To me this seems reasonable - though I've not seen it mentioned anywhere. I wonder what are the likely consequences?

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Handy rule-of-thumb, thanks. The interesting point, of course, is "worth". Where a sizeable proportion of a company is state owned, but where the state can't sell "right now", I'd argue that traditional "multiply the number of shares by the share price" doesn't work in establishing what a company is "worth".

Doesn’t matter who owns the shares but it does matter if the share is a large cap or small cap and how liquid the stock is.

The FTSE 100, especially the big ones in it are very large and very liquid.

So the rule of number of shares times share price is quite good give or take 5%.

So you could pull out £50B from the FTSE 100 and not crash it. The FTSE would drop but probably not more than 5%

Whereas if you tried to pull 5% of a small cap, you could crash its price considerably so its market cap derived from share price times shares in issue isn’t as accurate.

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As I understand it is

1. The current top 100 companies are based on last years top 100....

2. It it the share value of all these 100 companies.

The index constituents are actually reworked quarterly, so it is the last 3 months top 100. And i would expect it includes the full value of part-nationalised banks, including the government's part.

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Only the proportion of a company's shares that are in general circulation are included in the FTSE.

Shares that are held by an insider (e.g. Company founder) which are unlikely to be sold, or in the case of shares held by the government, where they have announced no plans to sell, are not counted.

For example, only 30% of RBS shares are included in the FTSE, and only 75% of heritage oil (small explorationcompany) are in the FTSE 250 (25% owned by the chairman and founder)

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I completely disagree. The index may take no account of who owns the shares, but - in the real world - it matters a lot if the shares are entirely owned by rational private sector investors, or if a sizeable proportion of the shares are owned by the state. It alters... to suggest otherwise would be akin to confusing housing equity with house prices.

that wasn't the question though.

and it alters.... what? you didnt say.

edit to add; i notice that it was you that posted the original question. yet you now go off on a tangent and disagree with what was the shortest and most correct answer. the value of the FTSE is a weighted average of its constituents, and it doesnt take into account who the owners are, be they private investors or taxpayers (via the govt.)

Edited by MSWHPC

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Doesn’t matter who owns the shares but it does matter if the share is a large cap or small cap and how liquid the stock is.

The FTSE 100, especially the big ones in it are very large and very liquid.

While I might be falling into the trap of arguing the philosophical point about "what matters" - you seem to be making assumptions which I think are only appropriate in a bull market.

While I accept the practical point about what can be achieved - I think it matters a lot, especially in the context of the non-immediate-term, as we need to consider capital allocation by investors - not merely asset holdings. If the government owns a substantial stake in a substantial company, that is a chunk of capital that private investors don't need to find. In a broader context, of course, I think it even matters who the investors are. For example, it is likely relevant what proportion of the shares are owned by institutions such as pension funds - etc; and questions such as investor leverage seem relevant, too.

Only the proportion of a company's shares that are in general circulation are included in the FTSE.

Shares that are held by an insider (e.g. Company founder) which are unlikely to be sold, or in the case of shares held by the government, where they have announced no plans to sell, are not counted.

Interesting - and completely the contrary answer of the earlier posters. Can you give me a reference for this?

that wasn't the question though.

and it alters.... what? you didnt say.

edit to add; i notice that it was you that posted the original question. yet you now go off on a tangent and disagree with what was the shortest and most correct answer. the value of the FTSE is a weighted average of its constituents, and it doesnt take into account who the owners are, be they private investors or taxpayers (via the govt.)

:) Oh, the ellipsis was somewhat incoherent of me, sorry... you could substitute "everything that matters, IMHO".

I am not disagreeing with any answer, I remain curious - especially as the answers in this thread seem divergent. One thing about which I'm adamant, however, is that the construction of the FTSE100 is of critical importance to anyone who uses it in any way - for example, in guiding economic forecasts or for investment/speculation in trackers and the like.

I'm trying to generate a model for the impact of the government's stake in banks on the FTSE100. In order to tackle this, I need to be sure how the index is constructed... public perception of the index is also relevant (though, probably, to a lesser degree).

Given the divergent answers... I'd really appreciate any links to definitive sources which detail how, for example, RBS is valued in the context of the FTSE100 - given the large government stake in this bank.

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Interesting - and completely the contrary answer of the earlier posters. Can you give me a reference for this?

http://www.ftse.com/Indices/UK_Indices/Dow...ndex_Rules.pdf#

4.6 The FTSE UK Series is adjusted for free float restrictions and cross-holdings.

4.6.1 Free float restrictions include:

a) trade investments in an index constituent either by another constituent (i.e.,

cross-holdings) or non-constituent company or entity,

b ) significant long term holdings by founders, their families and/or directors,

c) employee share schemes (if restricted),

d) government holdings.

e) Portfolio investments subject to a lock in clause, for the duration of that

clause

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http://www.ftse.com/Indices/UK_Indices/Dow...ndex_Rules.pdf#

4.6 The FTSE UK Series is adjusted for free float restrictions and cross-holdings.

4.6.1 Free float restrictions include:

a) trade investments in an index constituent either by another constituent (i.e.,

cross-holdings) or non-constituent company or entity,

b ) significant long term holdings by founders, their families and/or directors,

c) employee share schemes (if restricted),

d) government holdings.

e) Portfolio investments subject to a lock in clause, for the duration of that

clause

Thanks, yes - that's conclusive. :) Also, given RK's find on the FT, it seems RBS is about 42% owned privately - which sort-of adds up given media reports about a ~60% government stake.

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