09-08-11, 02:25 PM
A given market, eg. The FTSE is made up of components, in the FTSE's case, the 100 largest companies listed in the UK.
They are all represented in the index but greater weighting is given the larger the company within the FTSE so whilst each company will be represented to the tune of say 1 share, if your company is say Glaxo, it might be represented by 3 shares and if it was Vodafone, it might be represented by 10 shares. I remember reading somewhere a few years ago that the 3 largest companies on the FTSE make up about 30% of the total value of the FTSE.
When a market falls it is just a representation of the fact that general feeling is that the current economic situation in the market that those companies occupy is not healthy enough to support their current share price, making them over-valued, so the price drops. A bear market.
If, say, the Government wanted to improve the economic climate for the man in the street and decided to drop Income Tax to 10%, everyone would feel flush and with smiles on their faces go out and buy 42" LCD's and shiny new cars etc.
Under those circumstances the fund managers would feel that the market had a healthier future thus making the market currently under-valued, so the index would go up. A bull market!
They are all represented in the index but greater weighting is given the larger the company within the FTSE so whilst each company will be represented to the tune of say 1 share, if your company is say Glaxo, it might be represented by 3 shares and if it was Vodafone, it might be represented by 10 shares. I remember reading somewhere a few years ago that the 3 largest companies on the FTSE make up about 30% of the total value of the FTSE.
When a market falls it is just a representation of the fact that general feeling is that the current economic situation in the market that those companies occupy is not healthy enough to support their current share price, making them over-valued, so the price drops. A bear market.
If, say, the Government wanted to improve the economic climate for the man in the street and decided to drop Income Tax to 10%, everyone would feel flush and with smiles on their faces go out and buy 42" LCD's and shiny new cars etc.
Under those circumstances the fund managers would feel that the market had a healthier future thus making the market currently under-valued, so the index would go up. A bull market!