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Beware of volatility in the FTSE 100

Over the last few weeks it has become more and more apparent that a small number of extra large companies in the UK FTSE 100 index are having a massive impact upon movements in the stock market. When you consider that the top 10 companies in the FTSE 100 equate to 47% of the value of the index it is easy to see why a collapse in the BP share price for example can have such a major impact upon not only stock market indices but also investor confidence.

While the FTSE all share Index was another useful barometer for the UK economy, which includes 600 stocks, the FTSE 100 companies in total equate to 85% of the value of this index. Many people believe it is time for the stock exchange to review the weightings given to some of the large UK companies and rebalance these to give it a "fairer" reflection of the stock market.

Whether or not the authorities will review the balancing and weighting of the FTSE 100 index and the FTSE all share Index remains to be seen. However, in the meantime investors need to be aware that we could see extreme volatility caused by the share price movements of a small number of stocks.

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