Everything you need to know about the UK stock market

You’ve probably heard of the London Stock Exchange and the FTSE 100 without thinking too much about what these names actually refer to. Perhaps the same goes for the AIM market and the FTSE 250.

These phrases get bandied around quite a lot and if you’re an investor in UK shares or funds, it probably makes sense to get familiar with what each of these represents, in order to gain deeper insights when reading articles or research on UK markets.

London Stock Exchange

The London Stock Exchange (LSE) can trace its roots back to the seventeenth century and is one of the largest stock exchanges in the world. It can be thought of as a marketplace, where buyers and sellers come together to transact in their wares, in this case shares. This used to happen physically on the trading floor, but now takes place digitally. The London Stock Exchange has two parts, the Main Market and the Alternative Investment Market (AIM).

Main Market

There are over 1,400 companies on the Main Market of the LSE, which are in total worth over £3 trillion. Some of these are very large companies like Shell, AstraZeneca and Lloyds, which are worth tens of billions of pounds. But there are also smaller companies traded on the Main Market that are worth just a few million pounds.

There are rules governing the companies that can be listed on the Main Market in terms of their transparency and reporting, which in turn provides reassurance to investors. That doesn’t absolutely guarantee that there will never be any accounting blunders or scandals, and indeed we have occasionally witnessed these in the past. Thankfully though, they're rare occurrences.

Alternative Investment Market (AIM)

The AIM market is the second part of the London Stock Exchange and is often referred to as London’s junior stock market. That’s because it was designed to be a marketplace for companies that were at an earlier stage of their development.

In particular, regulatory requirements aren’t as stringent to list on the AIM market as they are on the Main Market, which means there is less protection for investors.

Companies on the AIM exchange will also tend to be smaller and less developed, which adds to the investment risk. However, there are some larger companies which trade on AIM which have simply decided not to make the leap onto the Main Market.

Aquis Stock Exchange

You may also come across the Aquis Stock Exchange, which is separate to the London Stock Exchange, and focuses on smaller companies.

Some of the companies trading on this exchange will be at a very early stage of development and may have little or no trading history, and low levels of liquidity, which may make them more difficult to buy and sell. Such companies are at the risky end of the stock market spectrum.

Read more about these types of risks

The FTSE indices

Even if you're new to investing, you'll have almost certainly have heard of the FTSE 100. This is just one of a family of indexes put together by FTSE Russell, which is owned by the London Stock Exchange’s parent company, LSEG.

An index such as the FTSE 100 is not a marketplace like the London Stock Exchange where you buy and sell stocks. Instead, it’s a list of shares that fulfil certain criteria as laid down by the index provider.

If the London Stock Exchange is a marketplace, you can think of the FTSE UK indices as off-the-shelf shopping lists that have been put together to make things a bit more manageable for investors.

Indices like this are very influential as they serve as barometers of the health of regional stock markets, and provide benchmarks that are followed by both active and passive funds.

FTSE Russell isn't the only company providing indices made up of UK stocks, but it's probably the best known for doing so. Its UK index family is weighted by market capitalisation. This means that the value of all the shares in a given company determine its weighting in the index, alongside all the other index members.

In order to qualify for inclusion in the FTSE UK indices, stocks undergo a number of screens, in particular, a screen to ensure there are sufficient shares traded on the open market. Companies which trade on the London Stock Exchange but have their primary listing overseas aren’t eligible for inclusion. Below is a brief description of three of the most popular indices.

FTSE 100

The FTSE 100 is the best-known index tracking UK stocks. The index is made up of the 100 biggest companies traded on the London Stock Exchange.

FTSE 250

Often referred to as the UK’s mid-cap index, the FTSE 250 is made up of the 250 largest companies traded on the London Stock Exchange, excluding the 100 companies which make up the FTSE 100.

FTSE All-Share

While the FTSE 100 might be the best-known UK stock market index, the FTSE All-Share is probably the most influential, as it's more commonly used as a benchmark by active and passive funds.

The index includes the FTSE 100 and FTSE 250, but it also includes some companies which are too small to be included in the FTSE 250.

There are currently around 200 of these smaller companies in the FTSE All-Share index, though this number does vary.

The index aims to represent at least 98% of the value of companies that are eligible for inclusion in the FTSE UK indices, and as such, it's usually held to be the best representation of the London Stock Exchange as a whole.

However, it doesn't include every stock listed on the exchange; most notably, it won’t include shares listed on the AIM segment of the market.