The FTSE 100 index of leading shares contains one bank with roots in the late 17th century, just after the reign of King Charles II. But another bank founded during that Kingâs reign is not a FTSE 100 member, or even listed on the stock market.
Understanding why can provide some useful insights that help me choose FTSE 100 shares for my portfolio even today, on the eve of the coronation of another King Charles.
Private or public
Just as royalty have private lives and a public role, the same is true of many businesses.
They may perform publicly important functions, like banking and food distribution, but that does not necessarily mean they are listed on the stock market. There are far more private businesses than publicly listed ones.
Banks of time
You can see the head office of Hoares bank on Fleet Street, as has been the case since the 17th century. But you cannot buy its shares on the stock market, as it is privately owned.
Yet other privately owned businesses are listed on the stock market. So, why are some companies like Hoares private while others such as HSBC and NatWest are publicly traded?
Private companies can list because their current owners want to cash in their investment and a public listing lets them do that.
Another reason can be that a company wants to raise funds for growth by selling some of its share. An example of that in recent years was THG. Since listing in 2020, its shares have lost over 80% of their value.
In fact the challenge of accurately valuing a previously private company is one reason I tend to buy shares that are already trading instead of snapping them up when a company has its initial public offering.
Size and the FTSE 100
So, Hoares remains private. But even if it was listed, it would not necessarily be a FTSE 100 company.
Just being around for a long time is not enough to get a listed firm into the FTSE 100. The index is basically made up of the companies with the largest market capitalisations.
Does that mean that they are the most attractive businesses from my perspective as an investor? Not necessarily.
Take another bank founded in the 17th century as an example: the Bank of Scotland. It merged with Halifax before being swallowed up by FTSE 100 member Lloyds during the financial crisis in 2008. It remains in business, still owned by Lloyds.
Lloyds is massively profitable, earning £1.6bn after tax in the first three months of this year. But its shares are far below where they stood back in 2008 — and have fallen 32% over the past five years.
Investing lessons
In other words, size is not everything when it comes to investing.
I do like the proven business models of many FTSE 100 companies. But, as when buying any shares, I do not look just at a companyâs past but also its expected future. I also consider its valuation. Even a strong business can make a poor investment if it is overvalued.
Being around for a long time and having a large market capitalisation can suggest that a company has done well. That alone, however, is never enough to make me buy a share.
The post This bank existed under the previous King Charles. Why isnât it in the FTSE 100? appeared first on The Motley Fool UK.
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HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.