Welcome to Investing.com’s comprehensive guide on the FTSE 100, the UK’s top stock market index.
Understanding the FTSE 100 is crucial for navigating the complex world of investing for both seasoned investors and those just starting out. In this article, we’ll demystify the FTSE 100 index, explore its significance for all types of investors, dive into its fascinating history, and unravel how it actually works.
What is the FTSE 100?
The FTSE 100, also known as the Financial Times Stock Exchange 100 Index, is the primary benchmark for the performance of the largest companies listed on the London Stock Exchange (LSE). It represents the top 100 companies by market capitalisation (overall value) in the UK, encompassing a wide range of sectors such as finance, energy, consumer goods, and more.
As a popular (if not the most precise) measure of the UK stock market’s overall health and investor sentiment, the FTSE 100 provides valuable insights into the country’s economic landscape. This index serves as a vital tool for investors to gauge market trends, make informed decisions, and track the performance of major UK-listed companies.
Is the FTSE 100 and Footsie 100 the Same Thing?
It’s a common question among investors: Is FTSE 100 the same as Footsie 100? The answer is yes, they refer to the same index.
The term “Footsie” is a nickname for the FTSE 100 and originates from the acronym FTSE (Financial Times Stock Exchange) pronounced as “footsie.” Pronouncing the FTSE as an acronym rather than an initialism (saying each letter separately as ‘eff-tee-ess-ee’) has gained popularity over the years, often used colloquially to refer to this prominent index.
So, when coming across references to Footsie 100, investors should rest assured that it’s simply another name for the FTSE 100.
It’s worth noting, however, that this nickname shouldn’t be confused with the FTSE Group, the organisation responsible for calculating and maintaining various FTSE indices (which will be discussed later in this article).
Now that we’ve clarified the relationship between FTSE 100 and Footsie 100, let’s delve into why the FTSE 100 holds great importance for investors.
Why Is the FTSE 100 Important for Investors?
In this section, we’ll explore the significance of the FTSE 100 to both investors and the wider economy. Understanding these aspects empowers investors to make informed decisions and maximise investment returns.
- Indicator of Investor Sentiment: As a widely followed index, the FTSE 100’s movements are closely watched by professionals and individual investors alike. When the FTSE 100 rises, it often indicates positive investor sentiment across large-cap stocks, and vice versa. Understanding the FTSE 100 can help investors gauge the prevailing market sentiment and make more informed decisions accordingly if they’re exposed to the full index, or alert them to dig deeper into individual FTSE 100 components if they hold individual shares.
- International Exposure: The FTSE 100 is known for its global reach, as many of the companies listed in the index have substantial international operations and generate a significant portion of their revenue from outside of the UK. This international exposure makes the FTSE 100 particularly attractive for investors seeking diversification and exposure to global markets. In cases where UK economic sentiment may be dipping, the FTSE 100 may still experience strong returns due to this multi-geographical exposure.
- Portfolio Benchmarking: The FTSE 100 often serves as a widely recognized yardstick for measuring portfolio performance. By comparing their returns against the index’s performance, investors can evaluate the success of their (usually Active) investment strategies and identify areas for improvement.
- Dividend Income Potential: Many companies in the index have a history of distributing regular dividends to their shareholders. This dividend income potential makes the FTSE 100 index appealing to income-focused investors, such as retirees or those seeking a steady stream of passive income.
Is the FTSE 100 Useful to Track the UK Economy as a Whole?
The FTSE 100 is generally not a good catch-all barometer for the UK economy. While many investors may use the FTSE 100 as a general snapshot of the UK economy, the fact that these companies have so much international exposure means that caution should be applied when aligning the FTSE 100 to overall UK economic health. In October 2022, FTSE Russell showed how the FTSE 250 has far less international exposure (and by extension may be a better barometer for UK investors).
Around 82% of the FTSE 100 revenues are from overseas markets, while, though still sizeable, this figure drops to nearly 57% for the FTSE 250.FTSE Russell Analysis, October 2022
What Other UK FTSE Indices Are There?
The FTSE 100 is far from the only index in the FTSE family. Here’s a brief overview of some notable FTSE indices, all of which offer investors different benchmarks and financial opportunities:
- FTSE 250 Index: Widely regarded as the benchmark for mid-cap stocks, the FTSE 250 (FTMC) includes the next 250 companies after the FTSE 100 in terms of market capitalisation. It provides insight into the performance of medium-sized companies and is often seen as an indicator of UK economic trends beyond the large-cap segment.
- FTSE 350 Index: Encompassing both the FTSE 100 and FTSE 250, the FTSE 350 (FTLC) tracks the performance of the 350 largest companies listed on the London Stock Exchange. It provides a comprehensive view of the UK equity market, incorporating a broad range of companies across different market segments.
- FTSE All-Share Index: The FTSE All-Share (FTAS) represents the aggregation of the FTSE 100, FTSE 250, and FTSE SmallCap indices. This broad index covers approximately 98% of the UK equity market, making it a valuable benchmark for tracking the overall performance of UK-listed companies and therefore the UK economy as a whole.
- FTSE SmallCapped Index: Focusing on smaller companies with a lower market capitalisation, the FTSE SmallCap index (FTSMXS) provides insight into the performance of small-cap stocks in the UK. It offers investors exposure to companies beyond the larger, more well-known firms in the FTSE 100.
These various FTSE indices expand the scope of analysis and investment opportunities, complementing and giving a more robust view than that provided only by the FTSE 100.
FTSE 100 History
In this section, we’ll discuss the history of the FTSE 100 to gain a deeper appreciation of its origins and evolution.
How Old is the FTSE 100?
The FTSE 100 was officially launched on January 3rd, 1984.
The start of this index marked the beginning of a new era in the UK financial markets. Since its inception, the FTSE 100 has become synonymous with the London Stock Exchange and has emerged as one of the most influential stock market indices globally.
How Was the FTSE 100 Created?
The creation of the FTSE 100 was a collaborative effort between the Financial Times (FT) and the London Stock Exchange (SE), hence the name. The two institutions joined forces to establish a benchmark index that would represent the performance of the largest companies traded on the London Stock Exchange, as well as initiate the introduction of a London market for stock index futures and options. The selection process involved identifying the top 100 companies by market capitalisation and ensuring that the index offered a diverse representation of various sectors and industries. (Further information on company eligibility can be found later in this article).
Initially set at a base level of 1,000 points, the FTSE 100 started its journey as a point-based index. Over the years, it has evolved to include a variety of methodologies and adjustments to accurately reflect market dynamics and investor interests.
Understanding the historical context of the FTSE 100 allows investors to appreciate its significance and track record of providing valuable insights. Next, let’s uncover more about the workings of this influential index and its impact on the UK investment landscape.
How Does the FTSE 100 Work?
To understand the FTSE 100, it’s vital to get to grips with how it actually functions. In this section we’ll explore factors affecting the index, weighting, eligibility and recalibration schedules.
When is the FTSE 100 Open?
The FTSE 100 operates during the regular trading hours of the London Stock Exchange, which are typically from Monday to Friday, 8:00 a.m. to 4:30 p.m. local time. During these hours, investors can actively trade the constituents of the FTSE 100 and monitor its real-time fluctuations.
There is more in-depth information about the FTSE 100 opening times available here on the investing.com Academy.
What Affects the FTSE 100?
Several factors influence the movement of the FTSE 100 index, and therefore its overall value. These include:
- Macroeconomic indicators
- Geopolitical events
- Monetary policy decisions (such as BoE interest rates)
- Currency exchange rates (affecting British Pound Sterling, GBP)
- Corporate earnings reports
- Global market trends
- Commodity Prices
- Investor Sentiment
It is important for investors to stay informed about these influences to understand the dynamics of the FTSE 100. Investors can be one step ahead of these changes by using the free charts and analysis offered on the investing.com’s FTSE 100 Overview page, or by signing up to InvestingPro.
FTSE 100 Weightings
The FTSE 100 employs a market capitalisation-weighted methodology, which means that companies with larger market capitalisations have a greater impact on the index’s movements as a percentage. This approach ensures that the index reflects the relative size and importance of the constituent companies. As a result, the share prices and market values of larger companies in the FTSE 100 can have a more significant effect on the index compared to smaller companies.
To be eligible for inclusion in the FTSE 100, companies must meet specific criteria established by the FTSE Group. The primary requirements include:
- Having a full listing on the London Stock Exchange
- A significant proportion of shares available for public trading, and
- Meeting certain nationality and liquidity criteria
These eligibility criteria aim to maintain the index’s integrity and ensure the inclusion of actively traded and widely recognised companies in a consistent manner across time, to accurately reflect the largest portion of the UK equity market.
The FTSE Group closely monitors the eligibility of companies and reviews the index composition regularly to maintain accuracy. If any errors or exceptional circumstances are identified, adjustments can be made to rectify the situation.
Overall, while the FTSE 100 strives for accuracy and consistency in company eligibility, occasional anomalies or unintentional inclusions/exclusions can occur due to extraordinary events or market dynamics. For example, a company’s market capitalisation may experience significant, sudden volatility, causing it to move in and out of the FTSE 100.
Additionally, corporate events such as mergers, acquisitions, or delistings can impact a company’s eligibility for the index.
How Often Is the FTSE 100 Recalibrated?
The FTSE 100 is checked on a quarterly basis (usually on the Wednesday following the first Friday in March, June, September, and December), in a process that involves reviewing the constituent companies’ market capitalisations and ensuring they meet all eligibility requirements.
The effective date of rebalance is then completed after the close of business on the third Friday of the review month (i.e. effective Monday).
The recalibration ensures that the index accurately reflects the changing market dynamics and the relative importance of the constituent companies. Investors should be aware of the quarterly recalibration schedule to stay up to date with any changes to the index composition.
How Is the FTSE 100 Price Calculated?
The FTSE 100 index price is calculated using a methodology that takes into account the market capitalisation of its constituent companies.
The calculation involves multiplying the share price of each company by its total number of shares outstanding, resulting in the market value of each company. The market values of all the constituent companies are then aggregated to determine the overall value of the FTSE 100.
The FTSE 100 index is a capitalisation-weighted index, which means that companies with larger market capitalisations have a greater influence on the index’s movements. As a result, changes in the share prices of larger companies will have a bigger impact on the overall index value compared to smaller companies.
What Is the Average Value of the FTSE 100?
Understanding how the FTSE 100 price is calculated and having a historical perspective on its average values can provide valuable insights into the index’s performance over time.
|Year||Average Total Value|
Taking the full history of the FTSE 100 from the above table, the overall average FTSE 100 value would be £496.28 billion, with an average annual increase of (approximately) 9.15%.
Which Companies Make up the FTSE 100?
The FTSE 100 is composed of a diverse range of companies from various sectors, representing the largest and most prominent companies listed on the London Stock Exchange.
Here are a few examples of companies that have been part of the FTSE 100 for more than 10 years:
- Name: Unilever (ULVR)
Sector: Multinational consumer goods
FTSE 100 Constituent Since: 1984.
- Name: GlaxoSmithKline (GSK)
Sector: Global pharmaceuticals
FTSE 100 Constituent Since: 1997.
- Name: BT Group (BT)
FTSE 100 Constituent Since: 1984.
- Name: British Petroleum (BP)
FTSE 100 Constituent Since: 1984.
- Name: Lloyds Banking Group (LLOY)
FTSE 100 Constituent Since: 1984.
- Name: Prudential (PRU)
Sector: International financial services
FTSE 100 Constituent Since: 2000
- Name: Diageo (DGE)
Sector: Multinational alcoholic beverages
FTSE 100 Constituent Since: 1997
These are just a few examples of the diverse range of companies that have joined the FTSE 100 during different periods and have sustained their positions in the index.
Companies That Joined and Later Left the FTSE 100:
It is important to note that the composition of the FTSE 100 changes over time due to various factors, such as market dynamics, company performance, and eligibility criteria (as seen below).
- Rolls-Royce Holdings (LON: RR): Joined the FTSE 100 in 1984 but was subsequently removed in 2020.
- Marks & Spencer (LON: MKS): Entered the FTSE 100 in 1984 but was later removed in 2019.
- Royal Mail (now International Distributions Services PLC (LON: IDSI)): Joined the FTSE 100 in 2013 but was removed in 2020.
How Many Companies Are in the FTSE 100?
The FTSE 100 consists of 100 companies, as the name suggests. These companies are selected based on their market capitalisation and other eligibility criteria. The index is designed to represent a diverse cross-section of the UK’s largest publicly listed companies, covering various sectors of the economy. Being included in the FTSE 100 is a prestigious achievement, indicating a company’s size, significance, and market influence.
What is a FTSE 100 Company?
A FTSE 100 company simply refers to a publicly listed company that is part of the Financial Times Stock Exchange 100 Index, commonly known as the FTSE 100.
Inclusion in the FTSE 100 index is a mark of prestige and often indicates a company’s stability, market value, and overall importance within the UK business landscape.
Can I Buy FTSE 100 Shares Easily?
Investors have several options when it comes to buying FTSE 100 shares, whether they prefer index funds or individual stocks.
Here are the different ways to invest in FTSE 100 shares and how the process compares to other UK indexes:
FTSE 100 Index Funds:
Investors can purchase exchange-traded funds (ETFs) or mutual funds that track the performance of the FTSE 100 index. These funds provide broad exposure to the entire FTSE 100, allowing investors to benefit from the overall performance of the index without being too concerned when an individual stock experiences negative volatility.
- Diversification: Investing in FTSE 100 index funds provides instant diversification across a range of companies, sectors, and industries within the UK market.
- Cost-effective: Index funds typically have lower expense ratios compared to actively managed funds, making them a cost-effective option for investors.
- Range of Options: Finding the best ETF investment broker isn’t as arduous as it once was, and there are many available depending on an investor’s personal criteria.
FTSE 100 Individual Stocks:
- Direct Stock Purchases: Investors can buy individual shares of FTSE 100 companies through brokerage accounts on the best trading platforms available. This allows investors to have ownership in specific companies rather than the entire index.
- Targeted Investments: Investing in individual stocks provides the opportunity to focus on specific companies based on their performance, growth prospects, or industry trends.
- Research and Due Diligence Data: When investing in individual stocks, investors need to conduct thorough research and analysis to make informed decisions. This involves studying company financials, industry trends, and market conditions. Thankfully, this data is widely available across both free and paid platforms such as InvestingPro.
FTSE 100 Investment Difference From Other UK Indexes:
- Similar Investment Methods: The process of buying FTSE 100 shares is generally similar to other UK indexes, such as FTSE 250 or FTSE All-Share. Investors can use the same investment vehicles, including index funds or individual stocks, to gain exposure to these indexes.
- Diverse Range of Companies: The FTSE 100 represents the largest 100 companies listed on the London Stock Exchange, while other indexes like FTSE 250 or FTSE All-Share include different sets of companies based on their market capitalisation. The FTSE 100 is often considered more internationally focused and may have larger multinational companies compared to other UK indexes.
- Market Liquidity: As the most widely followed index in the UK, the FTSE 100 generally offers high market liquidity, making it easier to buy and sell shares without significant price impact. This liquidity can be advantageous for investors seeking flexibility in their trading activities.
It’s important for investors to consider their investment goals, risk tolerance, time horizon and other preferences when deciding between index funds and individual stocks. Index funds offer broad market exposure and convenience, while individual stocks provide the opportunity for targeted investments and potential higher returns.
Where Can I Find More Info on the FTSE 100?
When it comes to finding comprehensive information on the FTSE 100, there are a multitude of reliable sources and platforms available to help investors make informed decisions and stay updated with the latest market trends and developments.
- FTSE 100 Live Overview
- FTSE 100 News and Analysis
- FTSE 100 Historical Data
- FTSE 100 Technical Analysis (including Candlestick Patterns)
- FTSE 100 Investor Commentary and Sentiment Analysis
Plus, it’s important to consider:
- Company annual reports: Annual reports released by individual companies listed in the FTSE 100 provide valuable information about their financial performance, strategic initiatives, and market outlook. These reports offer insights into the companies’ operations and can be obtained from their respective investor relations websites.
- Market research reports: Various financial research firms and market intelligence providers publish reports on the FTSE 100 and its constituent companies. These reports often include detailed analysis, performance metrics, and forecasts for investors to gain a deeper understanding of the index and its components.
What is the FTSE 100? A Conclusion
In conclusion, the FTSE 100 serves as a vital index for investors seeking exposure to the UK stock market. With its 100 largest constituent companies, it reflects the performance of major players across various sectors. Understanding the history, workings, and components of the FTSE 100 is crucial for investors looking to make informed decisions.
Whether through index funds or individual stock purchases, investors can participate in the potential growth and stability offered by these leading companies. By staying informed with reliable sources such as investing.com and tracking key market indicators, investors can navigate the dynamic landscape of the FTSE 100 and seize opportunities for potential returns.
Remember, investing in the FTSE 100 should be based on individual goals, time horizon, risk tolerance, and thorough research. As investors embark on their investment journey, it’s important to keep these insights in mind to make sound decisions and navigate the exciting world of the FTSE 100.
FTSE 100: Key Information Takeaways
Here are 10 key takeaways to provide readers with a solid understanding of the FTSE 100:
- The FTSE 100, also known as the Financial Times Stock Exchange 100 Index, consists of the 100 largest companies listed on the London Stock Exchange based on market capitalisation.
- FTSE 100 and Footsie 100 are interchangeable terms referring to the same index, with “Footsie” being a colloquial nickname derived from the acronym “FTSE.”
- Other notable FTSE indices include FTSE 250, FTSE 350, FTSE All-Share, and FTSE Small Cap, each representing different segments of the UK stock market.
- The FTSE 100 has a rich history, dating back to its inception in 1984, and has since become one of the most widely followed stock market indices globally.
- The index is recalibrated quarterly, with companies being added or removed based on their market capitalisation rankings and eligibility criteria.
- The FTSE 100’s price is calculated using a market capitalisation-weighted methodology, giving more weight to companies with larger market values.
- Factors influencing the FTSE 100’s performance include global economic conditions, interest rates, geopolitical events, company earnings reports, and investor sentiment.
- Investing in the FTSE 100 can be done through index funds, such as ETFs or mutual funds, which track the index’s performance and provide broad exposure to its constituent companies.
- Individual stocks of FTSE 100 companies can also be purchased, allowing investors to have direct ownership in specific companies within the index.
- The FTSE 100 offers high market liquidity, making it easier to buy and sell shares without significant price impact.