The FTSE 100 is an index consisting of the shares of the 100 biggest companies by market capitalisation on the London Stock Exchange (LSE). The price of the index is determined by the price movement of these constituent stocks. To be included on the FTSE 100, a company must be listed on the London Stock Exchange, it must be denominated in pounds and it must meet minimum float and stock liquidity requirements.
Traders can speculate on the index’s price movements, as well as buy, sell or short shares of the constituents of the index.
‘FTSE’ stands for ‘Financial Times Stock Exchange’. This name is derived from the names of two companies that launched the FTSE – the Financial Times and the London Stock Exchange. The ‘100’ in ‘FTSE 100’ represents the number of stocks included in the index.
How is the FTSE 100 Calculated?
The FTSE 100 is calculated by weighing all stocks listed on the London Stock Exchange by market capitalisation. Then, the top 100 companies with the highest market caps are added to the index.
Stocks with higher market caps have more weight in the FTSE 100 and, therefore, have a bigger effect on the index’s price movements. The market capitalisation of each company is reviewed every quarter and the index is adjusted if necessary.
A Brief History of FTSE 100
The FTSE 100 was launched on 3 January 1984 and had a start value of 1,000.00. Since then, the make-up of the index has changed almost beyond recognition, with mergers, takeovers and disappearing companies, underlining the index’s purpose of acting as a barometer of market activity.
How has ‘the Footsie’ Performed in the Past?
When the FTSE 100 first launched in 1984, it bulged with household names, such as the retailer MFI Furniture, Boots the pharmacy and the grocer Tesco, as well as firms such as British Aerospace and British Petroleum. These were businesses built to meet the demands of the UK consumer.
As of 2023, only 28 of the original 100 companies remain listed on the FTSE 100. The components of the index have changed dramatically over the past four decades, but the index has still offered decent performance throughout. Since January 1984, the FTSE 100 has risen by 614%.
If you include dividends, the return is even greater. A £1,000 sum would theoretically have grown to £9,158, adjusted for 2% inflation, which is the government target inflation rate. Please note that past performance is not indicative of the future and investors should also consider the effect of any charges.
A few notable examples of original FTSE 100 companies that went over great changes since its inception include Boots, founded in Nottingham in 1849, which was bought by a Swiss private equity firm in 2007, the first FTSE member to be taken over by a private equity firm.
Another example is Allied Lyons, which began to experience problems in the late 1980s and merged with Domecq in 1994. It ceased trading in 2005 after being taken over by Pernod Ricard.
A more recent example includes Cadbury Schweppes, which was taken over by US food company Kraft for £11.5 billion in 2010. On the other hand, Woolworths wasn't in the index at the start but was promoted soon after. However, it failed during the financial crisis with the last stores closing in early 2009.
Other original FTSE 100 members still exist, but are no longer among the 100 biggest listed companies, such as Ladbrokes. Today, the index is full of global companies, such as HSBC, oil producer Royal Dutch Shell and drugmaker GlaxoSmithKline, all of which generate huge sales overseas. The vast majority of companies are domiciled or based in the UK. But only 29% of revenues are made here.
A better reflection of the UK economy now would be the FTSE 250. Companies listed on the 250 generate 55% of their revenues in the UK, according to data from Factset.
This means that investing in the FTSE 100 does not necessarily mean you’re investing in the UK, which is important to understand if you’re trying to build a balanced portfolio. It also leaves FTSE 100 investments at the mercy of currency swings. For example, a strong dollar can be good for UK companies that make their money in dollars. Once the dollar revenues are converted into local currency it would be worth more.
The FTSE continues to evolve with its constituents being reviewed every quarter. The index is changed to ensure it is a fair reflection of the current top 100 companies listed on the London Stock Exchange.
Are There Any Other FTSE Indices?
Although Footsie is the most well-known index, there are a number of other FTSE indices in the FTSE family, including:
- FTSE 250 – the 250 ‘next largest’ companies by market cap
- FTSE 350 – the FTSE 100 and 250 combined
- FTSE Small Cap – the 350th to 600th largest companies by market cap.
- FTSE All Share – the FTSE 100, 250 and Small Cap indices combined
These indices provide an opportunity to invest in different types of companies, from the mid-cap companies making up the FTSE 250 to some of the more speculative companies in the FTSE Small Cap.
How Can You Trade the FTSE 100?
You can trade the FTSE 100 with derivatives such as CFDs and spread bets, which enable you to speculate on price movements – positive or negative – without owning any underlying assets. Both products are leveraged, and you’ll get full exposure with a small deposit, known as a margin. Bear in mind, though, that with leverage you run the risk of greater losses or profits. You can trade spread bets without paying any tax and offset CFD losses against profits.
With both CFDs and spread bets, you’ll get access to two types of indices market.
Index Trading with CFDs
First, it should be noted that in theory an index cannot be either bought or sold directly as stock indices are just indicators (benchmarks) that move according to the stocks held within. However, there are many financial instruments that reflect price movements of major world indices e.g. futures, options, ETFs, CFDs or index funds. That is why terms like “index investing” or “index trading” are often used in everyday situations.
Contracts for difference (CFDs) are commonly used for speculative and hedging purposes. Those contracts have many advantages such as: high liquidity, low entry barriers and low transaction costs, diversification purposes, long market hours, the ability to go long or short with leverage. Obviously one has to remember that CFDs are associated with higher risk as leveraged trading could potentially amplify either gains or losses. It does not change the fact that short-selling implements more flexibility and enables many useful strategies. You’ll learn more about short trading from our article on short selling.
Nowadays, CFDs serve mostly speculative purposes. Traders might simply open long positions in order to take advantage of prices moving up, or open short positions and benefit from prices moving down. Using leverage could potentially amplify either gains or losses. Indices trading could be a part of different strategies – for instance a belief that small caps will outperform blue chip stocks (then traders ought to go long on a small cap index) or an assumption that a certain stock exchange will slump e.g. due to geopolitical reasons (then traders ought to short the index from the given country).
You can find out more about indices trading in this article.
Index Futures
When you choose index futures, you agree to trade the index at a specific price on a specific date. Index futures have wider spreads, but open positions are not subject to overnight funding charges.
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