Everything you need to know about the UK stock market
Writer, Laith Khalaf
19 December 2024
5 minute read time
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.
Join Dan Coatsworth, Head of Markets, as he breaks down what makes up the three most popular indices in the UK stock market.
Hello. I'm Dan Coatsworth, an investment analyst at AJ Bell. I'm here today to talk to you about the main UK stock market indices. You may have heard lots of people talk about the FTSE 100, FTSE 250 and the FTSE 350.
Don't worry if you don't know what they are. This video will tell you everything that you need to know. These indices are baskets of stocks.
The FTSE 100 features the 100 biggest companies by market value on the London Stock Exchange.
The FTSE 250 is the next 250 biggest companies by market value.
And the FTSE 350 is simply the FTSE 100 and the FTSE 250 grouped together. They’re very important indices because they act as the benchmark for the UK stock market.
The FTSE 100 is considered to be the best representation of larger companies listed in the UK. When you hear people talking about the UK stock market in general terms, particularly if it's on the BBC or some of the other major news channels, you can be sure that they're referring to the FTSE 100. Companies in the FTSE 100 are generally valued at £4 billion or more. These are gigantic companies and many are household names. Lots of them will do business around the world.
The FTSE 250 is viewed as the benchmark for medium sized companies, often referred to as mid-caps, and you've probably heard of many businesses in this index as well as it contains names which have been around for decades as well as some more successful newer names. Investors are often attracted to the FTSE 250 index because it often contains businesses that still growing at a decent pace. Valuations typically range from about £400 million pounds to £4 billion pounds. Many companies in the FTSE 100 index may be growing at a slower pace than that those in the FTSE 250.
It's very hard to grow fast when you're already earning the big bucks. But many investors aren't put off from investing in FTSE 100 stocks despite this situation. They like the idea of backing big businesses and potentially collecting decent dividends Index provider FTSE Russell, which is owned by the London Stock Exchange, rejigs the FTSE 100 and FTSE 250 indices every three months.
The idea is to see if any companies have grown in value and could potentially be promoted to a higher index. FTSE Russell's review also kicks out companies which have fallen a lot in value and need to be demoted. Companies are bumped out of the FTSE 100 if they are no longer one of the UK's 110 largest listed groups.
Alternatively, names from the FTSE 250 are promoted into the FTSE 100 if they score within the top 90 by value when the market closes on a certain date every quarter. Anyone demoted from the FTSE 250 would fall into the FTSE small cap index. And below that level, you'll find the FTSE fledgling index.
AIM stocks don't qualify for inclusion in the FTSE 100, 250, small cap or fledgling indices, even if they're big enough. That's because AIM is a separate market, and it's got its own indices. If you want to track the performance of FTSE 100 or the FTSE 250 investment product, you can potentially look at tracker funds or exchange traded funds, which mirror the ups and downs from these indices. Thanks for watching.
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.
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Important information: These articles are for information purposes only and are not a personal recommendation or advice. If you’re not sure about the risks of investing, please speak to a qualified financial adviser. Remember that the value of investments can change, and you could lose money as well as make it.