Today we are continuing our series of articles on the world's major stock exchanges. This time, we are going to talk about the London Stock Exchange (LSE).
The LSE's Place in the Global Economy
The LSE is the world's third stock exchange in total market cap ($6.2T) and the number of listed companies (3,000). It is Europe's largest stock exchange. It is also the world's most multinational stock exchange: stocks from 68 countries are being traded here, including those of many Russian companies. These companies include British Petroleum, Imperial Tobacco, Vodafone, Rolls-Royce, Tesco, Sberbank, and Lukoil.
The listing requirements at the LSE are not as steep as those at the NYSE or NASDAQ. Its market is divided into two parts: the Main Market and the Alternate Investment Market. The Main Market is where the 1300 largest companies trade their stocks, while the Alternate Investment Market admits smaller companies that the exchange's management deems promising. The LSE's requirements for listed companies' earnings are not as steep as those of the NYSE or NASDAQ. There is a market cap requirement (no less than £700,000, which is about the same as on the NYSE, but it only applies to the Main Market). On the other hand, both the Main Market and the AIM have some strict “accessibility” requirements. For example, no single shareholder may own more than 30% of a company's shares. Unfortunately, many Russian companies do not meet this criterion.
One of the LSE's numerous buildings.
Even though the LSE only holds the third place in the world's stock exchange rating at the moment, it plays a unique role in the world stock market's history. It is one of the world's first specialized stock exchanges, and for over a century it had been the undisputed world leader. While technically it was founded in 1773, its actual history dates back to the 17th century, and this history teaches some valuable lessons.
The Royal Exchange in London was opened back in 1565. However, for a long time it had remained solely a commodity exchange. Only in 1695 did its management allow deals in government bonds and company shares. The changes caused by this decision were twofold. The exchange's popularity surged, but the bustle caused by the brokers did not sit well with the "decent gentlemen", and in 1698 they were expelled from the exchange. The entrepreneurs who wanted to trade company shares found a new place for their meetings: Jonathan's Coffee House in London. Unlike the Royal Exchange, any person could visit Jonathan's. The coffee house's owners and regular visitors welcomed the influx of the new people who wanted to try their hand at investing their stocks or "playing" with the stock market. The coffee house turned into a major business club. It is at Jonathan's where such common terms as "clearing", "bulls", and "bears" first arose in the 18th century. In 1773, stock traders at Jonathan's constructed a new building for conducting their business, and that building was the one to first receive the name of the London Stock Exchange. The English stock traders' experience served as an example to the entrepreneurs from other countries. As we have already said, the world's leading stock exchange, the NYSE, was also created by "coffee house" brokers in the 18th century.
London's stock traders at Jonathan's Coffee House (18th century)
In the 19th century the LSE became the world's leading stock exchange, having overtaken the Royal Exchange by a huge margin. Only in the 20th century, after World War I, did the LSE lose the lead to the NYSE. Today it only holds the third place in the world rating, having let NASDAQ overtake it as well.
The FTSE 100 Index
One of the world's major share indices – the FTSE 100, or “footsie”, is compiled according to the market values of the LSE's 100 largest listed companies. The total market cap of these companies is 80% of the exchange's total cap. The FTSE 100 Index is the main benchmark for the business activity in the United Kingdom as a whole.
Just like the American share indices, the FTSE 100 showed a steady growth until 1999, and then suffered temporary dips during the 2002-2003 and 2008-2009 periods. As of now, the index has returned to its pre-crisis values, but unlike the Dow Jones and S&P 500 indices, has not managed to surpass them. Interestingly, the FTSE 100 dropped slightly during Brexit (less than in 2015), and even grew somewhat afterwards. However, this growth is due to the drop in the pound sterling's exchange rate, as this is the currency that the companies at the LSE trade in.
Just like the American share indices, one can invest in the FTSE 100 and profit from the changes in it. To do this, one needs to buy shares of its exchange-traded fund (ETF) that tracks the index, iShares FTSE 100 UCITS ETF (ticker symbol ISF).
What Should an Investor Keep in Mind
The majority of stock brokers that grant DMA (as opposed to a CFD) to its clients also grant access to the LSE. EXANTE's clients get this type of access to all markets including the exchange of this article.
All the companies listed at the LSE can be seen at the Stock Screener service at finance.google.com (choose “United Kingdom” in the first box, and “London Stock Exchange” in the second). Let us see which companies are the first according to different criteria in this year.
In market cap the famous Royal Dutch Shell oil company is the undisputed leader. As its name implies, it is headquartered in the Netherlands. It trades in two types of shares with the ticker symbols RDSA and RDSB. Their total market cap is £385B. As such, Royal Dutch Shell is ahead of any company at the NYSE and is only behind Apple and Alphabet at NASDAQ.
The highest 52-week price increase by far was shown by a small and relatively young investment called Tejoori Limited. Its ticker symbol is TJI, its market cap is $9.6M, its 52-week price increase is 978%. The second place is held by a much larger gas company Pantheon Resources (ticker symbol PANR, market cap £322M, 52-week price increase 623%). The Russian gold mining company Trans-Siberian Gold (ticker symbol TSG, market cap £48M, 52-week price increase 363%) also showed outstanding results, holding the fifth place.
Despite Brexit, British companies manage to grow both in their stock prices and in their earnings. The UK is Europe's first in the number of companies with with the highest earnings for the last five years. The first place is held by Ashtead, an industrial equipment rental company (ticker symbol AHT, market cap £6.4B, 5-year earning increase 240%). The second place is held by the Esure insurance company (ticker symbol ESUR, market cap £1.2B, earning increase 232%). The third place is held by the Redrow construction company (ticker symbol RDW, market cap £1.4B, earning increase 218%). These are all large companies, and they are hardly new to the business.
The Personal Assets Trust investment company's shares are extremely expensive along with a relatively decent trading volume (ticker symbol PNL, market cap £712M, share price £39,000, average daily trading volume of 1500 shares). The real estate trading company Mountview Estates (ticker symbol MTVW, market cap £450M, share price £11,000, average daily trading volume of 263 shares) holds the second place. The first place in trading volume (if one disregards companies with extremely cheap shares) is held by the Lloyds Banking Group (ticker symbol LLOY, market cap £44B, share price £60, daily trading volume of 177M shares). In the few days before Brexit the group lost a third of its market value in pounds (in dollars that would be even more), and is gradually regaining its standings now. This explains the unusual activity surrounding the company's shares. Just on Brexit's day around a billion (!) of Lloyds shares was sold, worth several dozen billion pounds (!!).
The UK is famous for its robust investment funds. One of them, the Baronsmead Venture Trust (ticker symbol BVT, market cap £138M) keeps very stable prices for many years that rarely go outside the £80-100 range. Despite that, the company pays high dividends, around 10% per year. Even in 2008 the company's share prices only briefly dropped to £64 and went back to £80 the same year. In 2016 the company paid an unprecedentedly high dividend of £15 per share, which is around 17% of the share price. Unlike the high dividends of other companies that are motivated by populism, this fund's dividends are fully backed by the company's earnings and are not a "promotional scheme".
The LSE's working hours are 11:00-19:30 (8:00-16:30 GMT). The commissions for online brokers working with the LSE are usually different from the commissions when working with American stock exchanges. They are usually a percentage of the amount being traded and are typically around 0.05%-0.1%, and a minimum commission per deal can be as high as several pounds. At EXANTE, the commission is 0.05% of the amount being traded, and there is no minimum commission.