Is the stock market over heating?

Glastoun

The S&P seems to be dropping overnight but then working its way up in the day - who makes out of hours trades, and why would their sentiment be different to the people buying when trading is open?

Perelandra

Something I'm trying to get my head around...

Does tracking the FTSE 100 over this length of time really reflect the returns you'd get if you invested in it, given that the vast majority of companies that were in the index when it first launched no longer exist (most acquired)?

coastline

Perelandra wrote: »

Something I'm trying to get my head around...

Does tracking the FTSE 100 over this length of time really reflect the returns you'd get if you invested in it, given that the vast majority of companies that were in the index when it first launched no longer exist (most acquired)?

Its a bit like a league table based on market capitalisation...
The main companies will be valued in tens of billions and the ones near the bottom just a few billion pounds.
The index is reviewed on a regular basis and new entrants are promoted from the FT250 if they are capitalised more than the low companies in the FT100.
Think there was a cut off point somewhere near £1bn a few years ago..??....perhaps someone can add to this.
Tracker funds make adjustments on a daily basis as far as I can see...

http://www.ftse.co.uk/Media_Centre/press_packs/uk_review.jsp

cepheus

Glastoun wrote: »

The S&P seems to be dropping overnight but then working its way up in the day - who makes out of hours trades, and why would their sentiment be different to the people buying when trading is open?

I guess they are following trading in the far Eastern markets. It was China which was partly responsible for this latest 'blip'.

gadgetmind

coastline wrote: »

Tracker funds make adjustments on a daily basis as far as I can see...

Unless a company enters or leaves the index, which happens very infrequently, there is no need for the trackers to adjust anything. This is why market tracking is so cheap.

cepheus

coastline wrote: »

Its a bit like a league table based on market capitalisation...
The main companies will be valued in tens of billions and the ones near the bottom just a few billion pounds.
The index is reviewed on a regular basis and new entrants are promoted from the FT250 if they are capitalised more than the low companies in the FT100.
Think there was a cut off point somewhere near £1bn a few years ago..??....perhaps someone can add to this.
Tracker funds make adjustments on a daily basis as far as I can see...

The index funds need to buy and sell companies at the quarterly reviews to retain representative weightings of each company of the index. So there will be small admin. and trading costs passed on to the holders of these funds.

How Do Stocks Join and Leave The FTSE 100 Index?
http://www.stock-trkr.co.uk/how-do-stocks-join-and-leave-ftse-100-index

Perelandra

coastline wrote: »

Its a bit like a league table based on market capitalisation...
The main companies will be valued in tens of billions and the ones near the bottom just a few billion pounds.
The index is reviewed on a regular basis and new entrants are promoted from the FT250 if they are capitalised more than the low companies in the FT100./press_packs/uk_review.jsp

*nods* I understand the makeup-

But if you bought shares in an exact representative group of the FTSE 100 companies in 1984 and don't adjust as you go along, (using the same calculation method for the index itself), then clearly you wouldn't have the current value of the FTSE 100 as it stands today.

If, instead, you adjust your holdings on a regular basis, in order to reflect the changes in capitalisation (as a tracker would do), then overall you're probably going to lag the index as a whole (as companies you own fall out, although the impact of acquisitions is ambiguous). I don't know the extent of this lagging impact, though.

Overall, I don't think that an investment of £1000 in 1984 would be worth (inflation adjusted) £3,000 today for these reasons- but if I'm wrong, I would genuinely be interested in understanding this better!

gadgetmind

Perelandra wrote: »

If, instead, you adjust your holdings on a regular basis, in order to reflect the changes in capitalisation (as a tracker would do)

Wrong, wrong and thrice wrong!

A tracker that uses market cap buys *once* when a company enters the index, and sells *once* when it leaves. (1)

For the rest of the time, the cap is the cap. If it doubles in value, well that's cool, you now hold double, so no buying or selling required. If it halves, same again.

Market cap trackers are cheap because they trade almost never. Understand this if nothing else.

(1) - OK, so it also buys as people add/subtract funds to the tracker, but this is why some charge the stamp duty to those doing this churning. There are also minor tweaks as companies enter/leave, but as their cap is down in the noise, it's marginal.

Perelandra

gadgetmind wrote: »

Wrong, wrong and thrice wrong!

A tracker that uses market cap buys *once* when a company enters the index, and sells *once* when it leaves. (1)

For the rest of the time, the cap is the cap. If it doubles in value, well that's cool, you now hold double, so no buying or selling required. If it halves, same again.

Market cap trackers are cheap because they trade almost never. Understand this if nothing else.

(1) - OK, so it also buys as people add/subtract funds to the tracker, but this is why some charge the stamp duty to those doing this churning. There are also minor tweaks as companies enter/leave, but as their cap is down in the noise, it's marginal.

Sorry, I should've said "review" rather than adjust- but it's for those entries and leavers that I'm thinking about.

Over a short period of time, there may now be many- but over the long time (in my original post it was specifically over the 1984-present that I'm talking about), the proportion of the companies that have left is very high- over two thirds.

I'm not really wondering about tracker funds, though- I only mentioned that to try to understand the answer to the question "If I invested £1000 in the FTSE 100 in 1984, what would it be worth- after taking into account real changes in the composition of the FTSE 100 over those 29 years, if you regularly (although not frequently) adjust your holdings to maintain your representativeness of the FTSE 100".

Bazofts_Revenge

If you chose your investments because you personally believed in them then why sell on a couple of days bad news. I see it as a buying opportunity. Just waiting for payday....