What is the FTSE 100 Index? Complete Beginner’s Guide

FTSE 100 Index

What is the FTSE 100? Find out in Our Complete Guide

The FTSE 100 is a popular and widely quoted and traded market index. The share index acts a gauge of how businesses regulated by company Law in the U.K are performing. The index measures the performance of some of the biggest companies by market cap.

Read on for a complete beginner’s guide to what the FTSE 100 index is all about.

FTSE 100: Financial Times Stock Exchange 100 Index

FTSE 100 goes by the full name “Financial Times Stock Exchange 100 Index” sometimes shortened to FTSE or pronounced “Footsie”. The index came into be in 1984, as a joint venture between the London Stock Exchange and the Financial Times. The acronym FTSE originates from when the Financial Times and London stock exchange owned the index 50/50, hence the FT and SE that make up the name FTSE.

The FTSE Group, which is a subsidiary of the London Stock Exchange is tasked with the responsibility of maintaining the index. The London Stock exchange runs other indexes in addition to the FTSE 100, such as FTSE 250 and FTSE 350 all of which paint a unique picture of the overall stock market.

The FTSE 100 lists the top 100 companies by market cap, listed on the London Stock Exchange.

The FTSE 100 lists the top 100 companies by market cap, listed on the London Stock Exchange. The index seeks to provide a quick snapshot of the U.K stock market given its components which account for a huge percentage of the Kingdom’s total equity market value.  For this reason, if the index is up, it means most people in the broader market are buying shares, and when it is down, it means people are dumping shares.

Given that most of the companies listed in the FTSE 100 have vast operations overseas, the index does not paint a clear picture of how the U.K economy is performing. The FTSE 250 Index is one that is commonly used to gauge the health of the U.K economy given that it contains a small portion of internationally focused companies.

Just like other financial indexes around the world, FTSE 1000 is simply a measurement of the overall stock market in the U.K. Given the type of companies listed, and the index is commonly used to ascertain how various market segments are performing.

When the FTSE 100 came into being in 1984, it started at a notional value of 1,000 points. Over the years, the number has experienced swings based on the performance of the companies listed. Given that, the index is currently trading at about 7,000, it means that U.K top 100 companies have grown by more or less 600% over time.

However, this does not mean that the value of all the companies listed in the exchange has increased by more than six-fold. The fact that the index components have changed overtime points to disparity when it comes to gains and losses of the individual companies in the Index.

FTSE 100 Listed Companies

The FTSE 100 is made up of companies that have stood the test of times and persevered through various recessions as well as various economic cycles. These companies are often referred to as ‘blue chip’ companies as they command a premium tag when it comes to market cap and ability to generate shareholder value.

All the companies in listed in the FTSE 100 are constituent of the London Stock Exchange which is the main market in the U.K. Companies listed in the index account for 81% of the total value of all companies listed in the U.K main market.

All the companies in listed in the FTSE 100 are constituent of the London Stock Exchange which is the main market in the U.K.

Over the years the components of the FTSE 100 has changed significantly in part because of depreciation of market value, takeovers as well as mergers and disappearance of some companies.  Some companies have also undergone name changes such as HSBC which went by the name of Midland Bank.

Given that the FTSE 100 lists the top 100 companies by market cap, the FTSE 250 lists the next 250 companies by size. The value of the FTSE 250 accounts for about 15% of the total value of the U.K’s equity market. The FTSE 250 index is mostly made up of mid-size companies. The performance of the two indexes at times paints a picture as to how the U.K economy is fairing.

A merger of the FTSE 100 and FTSE 250 makes up the FTSE 350 index which accounts for about 95% of all companies listed in the U.K. The FTSE Small cap Index on the other hand accounts for about 2%. Adding up FTSE 100, FTSE 250 and FTSE Small cap and you end up with FTSE All Share.

Royal Dutch Shell is one of the companies listed in the FTSE 100. The company has survived some of the worst oil price crisis over the years over the years and still going strong. The company boasts of an annual dividend of more than 5% which justifies its position in the list, in addition to a strong market cap.

HSBC is another high profile inclusion in the FTSE 100 having generated significant shareholder value over the years. Other high profile companies listed in the index include mining giant BHP Billiton with a footprint across the globe, mobile telecommunication giant Vodafone, oil giant BP and mining giant Rio Tinto.

FTSE 100 Listing Process

The FTSE 100 undergoes changes on a quarterly basis to ensure that it only plays hosts to the top 100 companies in the U.K main market. However, if takeovers or mergers take place before quarterly changes go into effect, the changes have to be factored in accordingly to ensure the index maintains its status as an index of the top 100 companies.

The governing council follows a straightforward process when it comes to adding or removing a component from the index. The council which is made up of independent experts sits four times a year in March, June, September, and December. The council reviews the index and carries out the necessary changes based on the market cap of all companies listed in the London stock exchange

The market capitalization used for listing is calculated by multiplying the number of shares issued by the current share price.  Should the market cap of a company listed in the FTSE 250 rise and fall within the top 90 companies in the FTSE 100, the council is obliged to add it and downgrade one company to the second tier index. Conversely should a market cap of the company in the FTSE 100 fall below the 111th position it is removed from the higher tier and added’ to the FTSE 250.

The governing council maintains a banding system that ensures the review process does not in any way result in many changes, as a way of maintaining stability in the two indices. It is for this reason that at times, review meetings end up with no changes.

Listing Requirements

For Listing in the FTSE 100, a company must report Quarterly financial results to the FTSE Group. A company must also be listed in the London stock exchange in addition to meeting other minimum requirements such as level of liquidity.

The FTSE Group also monitors bonds held and issued by the companies listed as a way of ascertaining their financial stability.

FTSE 100 Weighting

The FTSE 100 is a market-weighted index whereby individual share prices are weighted to give rise to an index level that people see in the market. The basic formula deployed in the calculation of the index floating level is:

FTSE Formula

Free Floating adjustment factor represents the percentage of all shares readily available for trading.

The index being free to float essentially means it only takes into account the shares held in public hands and not restricted shares held by company’s insiders or government holdings. That said each company listed in the index is allocated an adjustment factor depending on the amount of shares publicly traded.

Considering that share price movement affects the total market capitalization of companies listed in the index, the index level tends to fluctuate throughout the day when the market is open.

The figure displayed during news time, mostly in the evening, represents the closing value after the closing of all the counters. The highest ever clocked FTSE 100 index value is 7,903 reached on 22 May 2018.

How Is The FTSE 100 Useful?

The FTSE 100 affects a good number of people in the U.K, in part because most pension funds are invested in the equity markets. The returns that people walk away in pension funds is correlated to the performance of the FTSE 100, given that it accounts for about 80% of the total equity market in the U.K.

The FTSE 100 affects a good number of people in the U.K, in part because most pension funds are invested in the equity markets.

The performance of the FTSE 100 also paints a clear picture of current international and economic events given that a good number of companies in the index do business around the world.

The FTSE 100 is commonly used to gauge the performance of the overall equity market in the U.K given that the index lists top 100 companies whose performance has a  broader impact on the overall stock market.

The index also acts as a useful performance benchmark that investors use to gauge the type of stocks to buy or sell. When the index level is rising, then it means the overall stock market is bullish which means investors are looking for buy opportunities in the broader market.

How to invest In FTSE 100

FTSE 100 being an index of some of the biggest companies in the world explains why it is one of the most sought-after investment vehicle, for gaining exposure to blue-chip stocks. There are many ways that local and international investors’ can use to gain exposure to the index as a way of diversifying investment portfolios.

Exchange Traded Funds that try to replicate the performance of the index are some of the best in this case.  Some commonly traded FTSE 100 ETFs include iShares FTSE 100 (LSE: ISF), HSBC FTSE 100 ETF (EPA: UKX) and DBX FTSE 100 (LSE: XUKX).

For American Investors American Depository Receipts offer the best route for gaining exposure on the FTSE 100. This includes investing in ADRs such as Vodafone Group (NASDAQ: VOD), Unilever Plc. (NYSE: UL) and HSBC Holdings (NYSE: HBC).

Things to Remember About the FTSE 100

  • The index futures contract are tradable between 7:01 and 1959 GMT from Monday to Friday
  • The FTSE 100 moves up and down in the increment of 0.50
  • The margin requirement for trading the index in most brokers is about 2%
  • The minimum trade size is capped at 1 index

Factors That Affects FTSE 100 Performance

Some of the factors that affect FTSE 100 performance on a daily basis include:

U.K Earnings Session

The FTSE 100 is known to move up and down on huge volume during earnings sessions. The index tends to move higher on earnings report of the listed companies turning out positive. The reverse is also true. Over the years, the index has proved to be vulnerable more so to earnings reports of top banks in the U.K, as they provide a clear insight as to how the overall economy is doing.

Eurozone Politics

The European Union being the United Kingdom biggest trading partner has also proved to have a significant impact on the performance of the Index. Adverse economic situations in the trading block most of the time triggers a sense of fear in the market which affects the performance of most stocks consequently leading to FTSE underperformance.

Economic Releases

Economic Releases tend to have an impact on various companies most of which are listed in the index, conversely affecting the FTSE 100 direction of trade. Some of the reports include interest rate hike decisions, Manufacturing data as well as UK GDP Data.

Ruchi holds a first degree in Accountancy and Post Graduate Diploma in Business Administration (First Class) from the International School and Business and Media in India. Proficient in financial databases like ThomsonOne, CapitalIQ, Factiva, and has also worked on Bloomberg and Datastream. She has previously worked as Assistant Manager at Genpact India, providing content in support of credit risk assessment of existing and potential clients of GE.


ruchi@moneycheck.com

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