In the case of the FTSE100, you are looking at one hundred of the strongest leading companies' shares, weighted by company size, then periodically averaged out to create an Index. These shares represent an equity holding in the companies concerned and they are worth something in their own right. They therefore have an intrinsic value as part-ownership of a company which is trading.The first secret to learn in trading successfully (as opposed to investing), is to forget about the intrinsic value of a stock, or any other instrument. What you need to be concerned with is its perceived value -its value to professional traders, not the value it represents as an interest in a company. The intrinsic value is only a component of perceived value.
This is a contradiction that undoubtedly mystifies the directors of strong companies with a weak stock! From now on, remember that it is the perceived value which is reflected in the price of a stock, and not, as you might expect, its intrinsic value. We shall return to this later, when looking at the subject of stock selection.
Have you ever wondered why the FTSE100 Index (or any other index) has generally shown a more or less continuous rise since it was first instigated? There are many contributory factors: inflation,constant expansion of the larger corporations and long-term investment by large players; but the most important single cause is the simplest and most often overlooked – the creators of the Index want it to show the strongest possible performance and the greatest growth. To this end, every so often they will weed out the poor performers and replace them with up-and-coming strong performers.
Author: Tom Williams,
Master the Markets
Taking a Professional Approach to Trading & Investing by
Using Volume Spread Analysis
Published by TradeGuider Systems