Guide to Analysing Companies

Indemnity
See guarantee.
Index
A statistical average of the prices of a number of things. The
things may be consumer goods (as in the consumer price index),
or they may be stocks and shares, as in stockmarket
indices such as the dow jones. Some stockmarket indices
reflect a narrow part of the market (averaging the share prices of
a handful of the largest, blue-chip companies, for example);
others try to reflect the whole market by averaging most of the
shares quoted on it. Yet others include stocks from only one in-
dustry or sector (an average of utility or of mining stocks, for
example). An index is a useful way of showing by how much,
and in which direction, prices are moving. In recent years, in-
vestors have moved away from narrow indices (such as the ft
ordinary share index, which covers the share prices of only
30 companies). Instead, they follow a combination of wider
indices (such as the ftse 100 and ftse 250) and those devoted
to specific sectors or parts of the market (such as the ftse
Smaller Companies Index). One of the most widely used family
of indices is compiled by Morgan Stanley Capital International.
Fund managers use them as benchmarks against which to
measure their performance, for bonds as well as equities in
I
INDEX
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different markets and in different sectors of those markets
throughout the world.
Index fund
A mutual fund or unit trust which invests in a portfo-
lio of shares that matches identically the constituents of a
well-known stockmarket index. Hence changes in the
value of the fund mirror changes in the index itself. So when
companies drop in or out of an index, as they do periodically
because of changes in their stockmarket capitalisation,
managers of index funds must adjust their portfolios accord-
ingly. For a company that falls out of an index because the com-
bined value of its shares (that is, its capitalisation) has shrunk,
the results can be drastic: index funds are forced to sell the
company’s shares, the effect of which can be to depress their
value even more.
Index-linked
Describes the linking of the redemption value (and sometimes
even the interest) of a security or loan to a general price
index (such as the index of retail prices). This is done to protect
the value of the security or loan from the ravages of infla-
tion. Whatever interest is paid after the indexing is the “real”
rate of interest on the loan or security.
Employers may also seek to link their employees’ pay to
indices such as the consumer price index in the hope that this
will act as a restraint. During periods of low inflation, or even
deflation, this can still lead to arguments over the level of pay.
Not surprisingly, governments then cast about for other indices
that prove their point.