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Investing for beginners: The global stock market

The simplest way for most people to own shares is via a global equity tracker fund. But what are global equities, never mind a global equity tracker fund?

London calling

Let’s take a step back. You’ll have heard of the City of London and the London Stock Exchange.

The London Stock Exchange is the market where shares listed for trade in the UK are bought and sold. The London Stock Exchange1 has been based in the City of London for hundreds of years. Today it’s all run on computers and in theory those computers could be anywhere. But they mostly remain in London, where hundreds of thousands of traders, accountants, lawyers, and others make their living from financial services.

The companies traded on the London Stock Exchange don’t have to be British, though they usually are. In many cases a lot of their revenues are earned overseas.

Think of a big oil company like BP. It’s a British firm but it makes money selling oil and other products all over the world. It’s the same with many of the other giant companies that trade on the London Stock Exchange – they earn around three-quarters of their income overseas.

Nevertheless, companies listed on the London Stock Exchange are UK-listed shares, by definition, because their shares trade in London.

A world of shares

Of course, the United Kingdom is not the only country with companies that people can invest in.

All developed economies have their own companies operating in various areas of business, from mining to manufacturing to retailing. The variety is endless.

It would be a simpler world if there was just one global stock exchange where shares in all these far-flung companies were traded.

But as things stand, there are distinct stock exchanges in different countries around the world. These exchanges facilitate trading in their own domestic shares, and often shares from smaller neighbouring countries, too.

For instance, another place you’ve probably heard of is Wall Street. (Or the least you’ll have seen the movie…)

Wall Street is home to the New York Stock Exchange – one of the major venues for trading shares in America’s listed companies.

Similarly, Germany has the Frankfurt Stock Exchange. Australia has the Australian Securities Exchange. And so on around the world.2

Deep breath! Stock market capitalisations

So, different countries’ exchanges boast different listed companies. As these companies do business over time they’ll achieve different results, which means different countries’ stock markets have historically delivered different returns.

That’s a lot of differences!

Also, the types of companies we’re talking about are not equally distributed around the world.

The UK, Australian, and Canadian stock markets have a lot of mining and energy companies.

In contrast, the US market is most notable as home to most of the world’s largest technology companies.

Another big difference between the various stock markets is their sizes.

The value of all the companies listed on a single stock exchange added together is called its total market capitalisation.

The UK stock market has a total market capitalisation of around $6 trillion.3 The New York Stock Exchange has a market capitalisation of over $20 trillion. Another big US stock exchange, the technology-focused Nasdaq, is over $10 trillion in size.

Clearly then, the total value of US-listed companies is much larger than the UK equivalent.

But as it happens the UK is still one of the world’s biggest stock markets.

Some exchanges are relative tiddlers. The Italian stock exchange, for instance, has a market capitalisation of less than $500bn.

The global stock market

If you add together the value of every country’s stock market, you get the global market capitalisation.

The global market capitalisation is the total value of all the publicly traded shares listed around the world, translated into a common currency (invariably US dollars).

The following pie chart shows each major country’s share of this global stock market pie:

Global stock market by country share

The components of the total stock market capitalisation, as per December 2016.

Source: Credit Suisse Yearbook 2017 / FTSE All Share

You can see from the graphic that the US market makes up by far the largest portion of the global equity market. It’s more than half the total.

Japan is in second place, and the UK is in third.

Note that Britain is punching above its weight here. We’re the third largest piece of the global stock market pie, even though our country’s economic output is smaller than the likes of Germany or China.

This reinforce an important point – a country’s stock market reflects only the value of the companies that are listed on it, not necessarily that nation’s economic output.

Back in the day

When you invest in one the various global tracker funds available, you are putting money to work in each of these different stock markets with just one simple investment.

The big benefit is you’re immediately diversified across the world’s different stock markets.

The amount of money your world tracker fund allocates to each country usually4 reflects that country’s portion of the total global market pie, as indicated by a global stock market index.

The computers that run these market cap weighted funds don’t try to do anything clever. They don’t aim to predict which country’s market will do better next year, or which might be over- or under-valued.

But that’s not the handicap you might think, because most – professionals, amateurs, or computers – who do try to do so will fail.

Cheap and cheerful global trackers

Diversification across the global market via a tracker fund has three major benefits:

  • It protects you from suffering potentially very steep losses should your own country’s market do very poorly compared to the rest of the world. (Obviously you also give up the opportunity for big gains if your home country does particularly well).
  • It automatically captures the waxing and waning of different stock markets over time.

These points are important because the investment returns from different markets have varied a lot, both in the short-term and the long-term.

By way of illustration, compare the snapshot in the graphic above of the global stock market – accurate as of 2016 – with the one below showing market share by country in 1900:

Pie chart showing global equity market in 1900

The global equity market as it stood 116 years ago.

Source: Credit Suisse Yearbook 2017 / FTSE All Share

Back in 1900, Britain made up the largest share of the global equity market. In contrast, the US, which now comprises more than half the total market, was just 15%.

This picture is always shifting, as economies and markets go through booms and busts, and investors’ appetite for different stock market’s prospects vary.

Another example: As recently as 1990 Japan made up the largest part of the global equity market, with a 45% share. The US was just 30% of the index.

How things change!

Key takeaways

We can now answer our initial question: What is a global equity tracker fund?

  • Remember, equity is just a fancier word for a share.
  • Global equities are the shares of all the different listed companies around the world.
  • A tracker fund is a passive fund that aims to replicate exposure to some particular market.
  • Because trackers are run by computers rather than expensive human beings, costs are kept very low compared to expensive active funds.
  • This makes a global equity tracker fund (also called a world tracker fund or world index fund) a cheap and efficient way to take a stake in thousands of companies listed around the world.

We’ve other articles that go into deeper detail on global tracker funds, which you can read to learn more.

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