



Here's how to enjoy a millionaire's retirement.

If you read about investing in the stock market, you'll see all sorts of seemingly meaningless magic words. FTSE 100? What's that? And then there's the FTSE 250, the FTSE Small Cap, the FTSE Fledgling...





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But what does it all mean? Well firstly, it's all very well being able to see how individual stocks are doing on a daily, monthly, or annual basis, etc. But that doesn't really tell us how well things are going in the investment world in general. And so the idea of a stock market index was born, which pulls together the valuations of a specified set of companies and provides an aggregate measure of their worth.





The 'FTSE' bit just stands for 'Financial Times Stock Exchange', and that's because the FTSE indexes are maintained by the FTSE Group, which was originally a joint venture of the Financial Times and the London Stock Exchange Group. The FTSE Group is now a wholly owned subsidiary of the London Stock Exchange Group (which is itself a company whose shares you can buy, and is listed on the FTSE 100).





THE BIGGEST, AND BEST?

The '100' part just means it covers the 100 biggest public companies listed in London, and that's by market capitalisation. Ooh, another buzz phrase. 'Market capitalisation' just means the total value of the company if you tot up all of its shares at the current market price. As examples, the FTSE 100 currently covers everything from Royal Dutch Shell, valued as I write at £218bn (and incidentally, more than 50% more valuable than the next biggest, HSBC Holdings at £142bn), to Mediclinic International valued at just under £4bn.





Because the Footsie (as it is sometimes whimsically known) is weighted in relation to the size of its constituent companies, every 1% change in the value of, for example, Shell shares will make a bigger difference than a similar 1% change in the value of Mediclinic shares.





GETTING STARTED

So how do you buy into the index and what are you getting? The usual way to go about it is to invest in what's called a tracker fund, and a FTSE 100 tracker just tries to follow the ups and downs of the index. Some funds actually buy shares in all the companies in proportion to their valuation, buy many these days use computer-based strategies that just try to emulate the index's performance. It can be worth checking a fund's tracking error before buying, but most of them are reasonably accurate these days.





One beauty of such funds is that you can typically drip cash into them, with regular modest payments -- it's often possible to invest as little as £20 per month, though more is better if you're sensible with your money. So you can get started with putting some of your savings into top quality shares with very little effort, and no need for any of your own individual company analysis.





And what you're getting for your money is effectively a partial ownership of the UK's biggest companies -- and in many cases, some of the world's biggest.





WHAT DO THE FIGURES MEAN?

Now that we know what the FTSE 100 is, what about its valuation? I've had people ask me many times -- its level is currently around 7,600, but 7,600 what? Is that billions of pounds, or something?





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It's actually just 7,600 points, and is an arbitrary figure intended to show relative valuations -- and it says nothing at all about the actual values of the companies in the index. The FTSE 100 was launched in January 1984 and was set at a base level of 1,000 points. It's been regularly updated ever since, with a formula that's weighted relative to the valuation of each company.





So when we look at that valuation today of 7,600 points, essentially all that is telling us is that its companies are now worth 7.6 times their overall value on that day back in 1984 -- and that it's however many percent up or down from yesterday, last week, last month, etc.





Here's how to enjoy a millionaire's retirement