Ftse all share index: Meaning, Criticisms & Real-World Uses

What Is FTSE All-Share Index?

The FTSE All-Share Index is a comprehensive stock market index that represents the performance of eligible UK companies traded on the London Stock Exchange (LSE). It belongs to the broader category of Stock Market Indices within financial markets. The FTSE All-Share Index is capitalization-weighted, meaning companies with larger market capitalization have a greater influence on the index's movement. It aims to capture approximately 98% of the total market value of all qualifying UK-listed constituent companies ³⁷.

History and Origin

The FTSE All-Share Index, originally known as the FT Actuaries All-Share Index, was launched on April 10, 1962, with a base level of 100³⁶. It was established to provide a broad measure of the UK equity market. Over time, the index series evolved with the introduction of key sub-indices. The FTSE 100 Index was added in January 1984, followed by the FTSE 250 Index in October 1992³⁴, ³⁵. These developments allowed for a more granular view of the market while maintaining the FTSE All-Share Index as the overarching barometer. The index is currently maintained by FTSE Russell, a global index provider wholly owned by the London Stock Exchange Group (LSEG)³¹, ³², ³³.

Key Takeaways

The FTSE All-Share Index is a comprehensive benchmark for the UK equity market, representing approximately 98% of the total market capitalization of eligible companies.²⁹, ³⁰
It is a capitalization-weighted index, meaning the performance of larger companies has a more significant impact on the index's value.²⁸
The index's constituents are regularly reviewed, typically quarterly, to ensure it remains representative of the market.²⁷
Investors and financial professionals use the FTSE All-Share Index as a gauge of overall UK economic health and stock market performance.²⁶
It serves as a basis for various investment products, including index funds and exchange-traded funds (ETFs).²⁴, ²⁵

Formula and Calculation

The FTSE All-Share Index is a capitalization-weighted index. This means the weight of each company in the index is proportional to its market capitalization. Market capitalization is calculated by multiplying a company's current share price by the total number of its outstanding shares.

The index value is generally calculated using a divisor method, where the aggregate market capitalization of all constituents is divided by a divisor. The divisor is adjusted to account for corporate actions like stock splits, dividends, and changes in constituents, ensuring the index value is not artificially affected by these events.

The formula for a company's market capitalization is:

\text{Market Capitalization} = \text{Current Share Price} \times \text{Number of Outstanding Shares}

The index value at any given time reflects the sum of the free-float adjusted market capitalizations of its constituent companies, divided by the divisor.

Interpreting the FTSE All-Share Index

The FTSE All-Share Index serves as a vital indicator for assessing the health and direction of the broader UK equity market. A rising FTSE All-Share Index generally signals positive sentiment among investors, often reflecting economic growth, strong corporate earnings, or favorable market conditions. Conversely, a declining index can indicate economic slowdowns, geopolitical concerns, or poor corporate performance.

Financial analysts and economists closely monitor the FTSE All-Share Index to understand trends, identify sectors performing well or poorly, and form outlooks for the UK economy. For investors, the index provides a benchmark against which they can measure the performance of their investment portfolio or actively managed funds focusing on UK equities. Because it covers a vast majority of the UK market, it is often seen as the most accurate representation of overall UK stock market performance²³.

Hypothetical Example

Imagine an investor wants to understand the performance of the overall UK stock market. They look at the FTSE All-Share Index. Suppose the index starts the year at 4,000 points. Over the year, several large companies within the index, particularly those with high market capitalizations, experience significant share price increases. For instance, a major financial services firm or an energy giant, both with substantial weight in the index, see their shares rise by 15%. Smaller companies within the index might have mixed performance, some rising and some falling, but their collective impact on the overall index is less due to their lower weighting.

If the FTSE All-Share Index ends the year at 4,400 points, it indicates a 10% gain for the overall market (calculated as ((4400 - 4000) / 4000) * 100%). This hypothetical scenario illustrates how the aggregate performance of the diverse constituent companies, weighted by their size, determines the index's movement and reflects the general trend of the UK stock market.

Practical Applications

The FTSE All-Share Index has several practical applications across the financial industry:

Benchmarking Investment Performance: Asset managers and individual investors use the FTSE All-Share Index as a benchmark to evaluate the performance of their UK-focused investment portfolio or funds. For example, a UK equity fund manager might aim to outperform the FTSE All-Share Index over a specific period.
Passive Investing: The index forms the basis for numerous index funds and exchange-traded funds (ETFs) that seek to replicate its performance. Investors can gain broad exposure to the UK equity market by investing in these vehicles, tracking the FTSE All-Share Index without needing to select individual stocks.²²
Economic Indicator: Financial analysts, economists, and policymakers observe the FTSE All-Share Index as a key indicator of the UK economy's health and investor confidence²⁰, ²¹. Significant movements in the index often correlate with broader economic trends or market sentiment.
Derivatives Trading: Derivatives, such as futures and options, are traded based on the FTSE All-Share Index, allowing investors to hedge against market risk or speculate on future movements.

The index's broad coverage makes it a comprehensive tool for market participants¹⁹.

Limitations and Criticisms

Despite its wide acceptance as a broad market indicator, the FTSE All-Share Index, like other capitalization-weighted indices, faces certain limitations and criticisms. A notable concern is index concentration. While the FTSE All-Share Index includes hundreds of companies, its capitalization-weighted methodology means that a relatively small number of very large constituent companies can heavily influence the index's performance¹⁸. This can lead to a situation where the index's movements primarily reflect the fortunes of a few dominant firms rather than the broader market's true health. For instance, the FTSE 100, which makes up a significant portion of the FTSE All-Share, has seen criticism regarding its concentration, with a small number of companies accounting for a disproportionate share of its value¹⁶, ¹⁷.

This concentration can pose a risk to diversification for investors using passive index-tracking strategies¹⁴, ¹⁵. If a few top-heavy stocks underperform, or face specific industry headwinds, their impact on the overall index can be substantial, potentially leading to increased volatility and reduced broad-market representation¹³. Additionally, the reliance on such large companies, many of which are multinational and derive significant revenue from overseas, can sometimes mean the index's performance does not perfectly align with the domestic UK economy¹².

FTSE All-Share Index vs. FTSE 100 Index

The FTSE All-Share Index and the FTSE 100 Index are both prominent benchmarks for the UK stock market, but they differ significantly in their scope and composition.

Feature	FTSE All-Share Index	FTSE 100 Index
Coverage	Represents around 600 eligible UK-listed companies¹¹	Represents the 100 largest UK blue-chip companies by market capitalization¹⁰
Market Capture	Aims to capture approximately 98% of the UK's total market capitalization⁸, ⁹	Represents approximately 80% of the UK's total market capitalization (as it forms a significant part of the FTSE All-Share)⁷
Constituents	Aggregation of the FTSE 100, FTSE 250, and FTSE SmallCap Indices⁶	Comprises the largest 100 companies from the FTSE All-Share
Purpose	Broad measure of overall UK equity market performance	Indicator of large-cap UK company performance and UK economic health, often seen as the "face" of the UK market⁵

The key distinction is that the FTSE All-Share Index offers a much broader and more comprehensive view of the entire UK equity market, encompassing large, mid, and small-cap companies. The FTSE 100 Index, while widely recognized, focuses solely on the largest companies, making it less representative of the performance of smaller, domestically focused UK businesses. Investors seeking a complete picture of the UK stock market typically look to the FTSE All-Share Index, while those interested specifically in the performance of large, established firms will focus on the FTSE 100.

FAQs

What types of companies are included in the FTSE All-Share Index?

The FTSE All-Share Index includes a diverse range of UK companies across various sectors listed on the London Stock Exchange, from large multinational corporations to smaller domestic businesses. It essentially combines the companies from the FTSE 100, FTSE 250, and FTSE SmallCap indices.⁴

How often are the constituents of the FTSE All-Share Index reviewed?

The constituent companies of the FTSE All-Share Index are typically reviewed quarterly by FTSE Russell, usually in March, June, September, and December. These reviews can lead to companies entering or exiting the index based on predefined criteria, such as market capitalization and liquidity.³

Can I invest directly in the FTSE All-Share Index?

No, you cannot directly invest in the FTSE All-Share Index itself. However, you can invest in financial products like index funds or exchange-traded funds (ETFs) that are designed to track the performance of the FTSE All-Share Index. These funds hold the underlying stocks in similar proportions to the index.²

Why is the FTSE All-Share Index considered important?

The FTSE All-Share Index is considered important because it provides a comprehensive benchmark for the overall UK equity market. It is widely used by investors, financial analysts, and policymakers to gauge the health of the UK economy and the performance of its stock market as a whole.¹