Stock Market Basics (shares, exchanges, indices)

Investing Fundamentals

Chapter 4 · Stock Market Basics (Shares, Exchanges & Indices)

Chapter 2 introduced stocks as an asset class; this chapter covers the actual machinery that turns "buying a stock" from an abstract idea into a real transaction — the exchange it happens on, how a company gets there in the first place, and the indices used to track how it's all doing.

Stock Exchanges: A Real, Organized Marketplace

A stock exchange is simply a real, regulated marketplace where shares are bought and sold. The London Stock Exchange (LSE) has a genuinely charming, real origin story: in the 17th century, stockbrokers were excluded from the Royal Exchange itself over their "perceived rude manners" and instead traded out of nearby coffee houses — a broker named John Castaing began listing commodity and stock prices at Jonathan's Coffee-House in 1698, the earliest real evidence of organized securities trading in London. The exchange wasn't formally established until 30 December 1801, when "The Stock Exchange" was inscribed above its own entrance. Today the LSE lists over 1,900 companies from more than 60 countries.

A Real, Enduring Motto

In 1923, the LSE received its own coat of arms bearing the Latin motto "Dictum Meum Pactum" — "My Word Is My Bond" — a real reflection of how the exchange's own early trading relied on trust and reputation as much as formal contracts.

How a Company Gets Listed: The IPO

A company doesn't simply appear on an exchange — it goes through an Initial Public Offering (IPO), selling shares to the public for the first time and converting from a private company into a publicly traded one. This is genuinely how a company raises real capital directly from investors, and it's the real moment shares in that company first become available to buy on an exchange at all.

Market Capitalization

A company's market capitalization ("market cap") is simply its share price multiplied by the total number of shares outstanding — a real, direct measure of what the market currently values the entire company at.

Large-Cap

Typically the largest, most established companies — the kind that dominate indices like the FTSE 100 and S&P 500.

Mid-Cap

Genuinely smaller than large-cap giants, but past the earliest, riskiest growth stage — often a real middle ground of risk and growth potential.

Small-Cap

The smallest publicly traded companies — real potential for faster growth, paired with real, typically higher volatility and risk.

Indices: Tracking the Market as a Whole

An index tracks a defined basket of stocks together, giving a single, real number that summarizes how that whole group is performing — rather than following one company's own share price alone.

The Real FTSE 100

The FTSE 100 — the UK's own headline index — began trading on 3 January 1984, at a real starting base value of exactly 1,000 points. It tracks the 100 most highly capitalized companies on the LSE, weighted by free-float market capitalization (so larger companies move the index more than smaller ones). It reached a real all-time closing high of 10,910.55 on 27 February 2026 — roughly a tenfold increase from its own 1984 starting point, a real, concrete four-decade demonstration of Chapter 1's own compounding theme.

A Genuine, Important Nuance

It's a common, reasonable assumption that the FTSE 100 tracks "how the UK economy is doing" — but this is genuinely only a loose approximation. Many FTSE 100 constituents are large, internationally focused multinationals earning most of their revenue abroad, which is why the index is real, documented as "a fairly weak indicator" of the UK's own domestic economy specifically, and is substantially influenced by pound sterling exchange rate movements rather than UK economic conditions alone.

Comparing Two Real Indices

	FTSE 100	S&P 500
Launched	3 January 1984	4 March 1957 (at its current 500-company size)
Tracks	100 largest companies on the LSE	500 large-cap companies on US exchanges
Weighting	Free-float market-cap weighted	Free-float market-cap weighted
Starting base	1,000 points	Not a round starting base in the same way — set by its own underlying constituent prices

Where This Goes Next

An index itself isn't something an investor buys directly — it's a real benchmark. Chapter 5 covers index funds, the actual, practical vehicle that lets an ordinary investor own a real, proportional slice of an entire index like the FTSE 100 or S&P 500 in a single purchase, rather than buying all 100 or 500 individual companies by hand.

Hands-On Exercises

Exercise 1

Using this chapter's own real figures, calculate the approximate total percentage growth of the FTSE 100 from its 3 January 1984 launch (base value 1,000) to its real all-time closing high of 10,910.55 on 27 February 2026. Then explain, in your own words, why this real growth figure connects directly back to Chapter 1's own compounding material.

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Exercise 2

A relative says, "The FTSE 100 fell today, so the UK economy must be doing badly." Using this chapter's own real material, explain in your own words why this conclusion doesn't reliably follow from the FTSE 100's own movement.

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Exercise 3

Explain, in your own words, the real difference between a company's IPO and a stock exchange itself — specifically, what real role each one plays in a share becoming something an ordinary investor can buy.

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Chapter 4 Quick Reference

LSE — real origin at Jonathan's Coffee-House (1698), formally established 30 December 1801, "Dictum Meum Pactum" motto (1923), 1,900+ companies listed today
IPO — how a private company first sells shares to the public and becomes listed
Market cap = share price × shares outstanding; tiered into large/mid/small-cap
FTSE 100 — launched 3 Jan 1984, base 1,000, real all-time high 10,910.55 (27 Feb 2026); a genuinely weak UK-economy indicator due to heavy multinational constituent revenue
S&P 500 — 500 large-cap US companies, current size since 4 March 1957, free-float market-cap weighted