The Financial Service Authority has just issued a report in which it expressed its concern over the FTSE100 index. This index, as the FSA noted, “does not reflect the key indicators that are used by most financial managers to assess the health of an individual company”. It added that many companies which have high share prices “often fail to meet their investment and other risk management responsibilities”. The FSA did not, however, make a direct reference to the indexing scheme.
However, it was apparent from the report that the FTSE100 index “has been subject to substantial increases”, leading to its decline in the past year. As a result, many people believe that there may be a link between the two. If the share price of a company goes up despite rising inflation, then there is likely to be a slowdown in its growth rate. This may in turn trigger share price decreases.
In its current state, the FTSE100 index does represent a buying potential. However, this kind of potential is not unlimited. It can only be achieved if the market expectations are right. In other words, investors need to believe that the company will continue to prosper in the near future. So while there might be a short term gain on the FTSE100, this gain is at the expense of the investor’s financial stability. This is where concerns about inflation begin to rear their heads.
A falling share price, then, represents a potential loss to the investor if the share price does not recover soon enough. Thus, amidst inflation rise worries, the FTSE100 should be viewed with some degree of caution. It is not advisable for people to purchase stocks based purely on the prospect of good returns. They need to look more closely into the company’s profit margins and history as well as its competitive advantages to determine whether or not the stock is a good buy.
Investors also need to be wary about buying stocks based solely on the index itself. The index is essentially a composite of different financial market indices including the FTSE100. Thus, it is important for investors to remember that FTSE100 reflects only part of the complete picture when it comes to international trading. More specifically, it does not reflect fundamental factors such as macroeconomics or the business environment. For this reason, it is not advisable to use the index to decide whether or not to purchase shares of a given company.
The good news is that the FTSE100 has risen above the specter of deflation. With this in mind, it is probably a good time to think seriously about investing in the stock market. One reason why FTSE100 stock is a good buy at this point in time is because it reflects the most recent trend of inflation in major currencies. Indeed, it is quite possible that investors will experience mixed results regarding whether or not they gain financially from the deal.