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This week, the FTSE 100 index of main firms hit an all-time closing excessive (index archivists have a look at each the closing worth every day and in addition the highs and lows the index hits inside the buying and selling day).
That may make it sound like now’s an terrible time to purchase FTSE 100 shares as they’re certain to be costly. Actually, I feel the other is true in some methods. Proper now, I reckon some lead index shares are priced as bargains.
Confused? Let me clarify!
Value and worth
The primary level to know is that worth and worth are usually not essentially the identical factor.
In a wonderfully environment friendly market, they is perhaps, the place issues are priced at precisely what they’re value (their worth). In actuality, that’s typically not the case. Some shares could also be overpriced relative to their long-term worth, whereas others go low cost.
So a excessive FTSE 100 degree doesn’t essentially imply the index is overpriced identical to a low FTSE 100 degree wouldn’t essentially imply it’s low cost.
A share index and an index of shares
However whether or not or not buyers suppose the FTSE 100 index provides worth, it’s made up of 100 particular person shares. So it may be potential to hunt for cut price shares to purchase, it doesn’t matter what the general index is doing.
Take Vodafone (LSE: VOD) for example. Whereas the FTSE 100 has moved up lately, over the previous 5 years this specific member has seen its shares halve.
Presently, the corporate has a market capitalisation of £19bn. But post-tax earnings final yr have been £12.3bn! The enterprise has a robust model, big buyer base and an entrenched place in lots of markets.
At all times have a look at the small print
Based mostly on that, Vodafone shares would possibly appear to be nearly unbelievably low cost.
Actually although, that is an instance of why, as an investor, it is very important dig into the small print of an organization and actually perceive its accounts.
For one factor, Vodafone’s earnings final yr have been exceptionally excessive. They’re usually far decrease and after promoting off companies not too long ago, I feel they might drop from their earlier degree.
These asset gross sales have helped the corporate scale back debt, but it surely stays substantial. The corporate has additionally introduced a swingeing reduce to its dividend subsequent yr.
Trying to find cut price shares to purchase
Even so, on steadiness, Vodafone appears to be like like a FTSE 100 cut price to me. I proceed to carry it in my Shares and Shares ISA.
Over time, I count on the FTSE 100 index to maintain rising. That isn’t assured however it’s seemingly, since it’s merely a snapshot of the 100 listed firms with the largest market capitalisations. So shrinking firms fall out of the index and fast-growing ones change them.
In that sense, a report excessive FTSE 100 doesn’t imply a lot to me. What I see as the actual alternative is discovering particular cut price shares contained in the index.
