FTSE 100 Market Overview
Maybe you’ve heard the term FTSE 100 and you’re not sure what it actually means.
Or perhaps you know the basics, but need a more in-depth explanation of what the FTSE 100 is, how it works, and some advice on how to use it for investing and trading.
Good news – you’ll find everything you need to know about the FTSE 100 index in this quick, jargon-light, and easy-to-understand guide.
What is the FTSE100?
In a nutshell, the FTSE 100 is a financial index composed of the 100 biggest companies listed on the London Stock Exchange (LSE), often referred to as “blue chip” companies. Sometimes you may hear people refer to the index as the “footsie” one-hundred, which is an informal way of saying FTSE 100.
FTSE stands for Financial Times Stock Exchange Index, due to the fact that the FTSE 100 Index was launched in 1984 as a joint venture between the LSE and Financial Times. It was launched as a replacement for the FT30 Index.
The FTSE 100 index lists the top one hundred companies with the highest total market value in the United Kingdom, from highest to lowest. A company’s total market value is found by taking the company share price and multiplying it by the total quantity of shares issued.
Although the FTSE 100 is the most commonly used UK index by investors and traders, other indices exist including:
– FTSE 250
– FTSE 350
– FTSE All-Share
– FTSE SmallCap
Additionally, there are three smaller indices that cover stocks for alternative investment markets (AIM) known as:
– FTSE AIM UK 50
– FTSE AIM 100
– FTSE AIM All-Share
How does the FTSE100 work?
The FTSE 100 is calculated by taking all of the stocks listed on the entire London Stock Exchange and weighing them by market capitalization. Once the calculation is done, only the top 100 companies in terms of market caps are added to the index. The calculation takes place once per quarter and the index price and listings are adjusted accordingly.
In a process known as free float capitalization, stocks that have a bigger market cap are weighted more highly and thus have more impact on the price movements of the FTSE 100 index. In other words, larger companies that have more stock “floating” will make more difference to the index than smaller ones.
How well does the FTSE 100 perform for investors?
Between 2010 to 2019 the FTSE100 returned 8.3% per year on average for any investors who decided to reinvest their dividends rather than withdraw them. Investors who decided not to reinvest saw an average return of 4.3% per year over the same period.
Sometimes you will hear the rise and fall of the FTSE indices given in points. The reason for this is that the value of the FTSE 100 was originally quoted in points with a starting value of 1000 when it was launched back in 1984. At the time of writing, the FTSE100 index has a point value of 6,908. Therefore the FTSE 100 has risen by almost 700% over the past four decades.
Here is a FTSE 100 chart covering the period between 1984 and October 2022.
How do you trade or invest in the FTSE 100 index?
Trading or investing in the FTSE 100 can be done in one of three main ways:
– Trade directly on the index
– Trade or invest in exchange-traded funds (ETF)
– Trade or invest in company shares
How to trade directly on the FTSE 100 index
The direct trading method involves the use of spread bet derivatives or CFD (contract for difference) derivatives. Derivatives are a type of speculative trading mechanism whereby the investor never actually takes ownership of the shares or underlying assets. Instead, the investor speculates on the price movement of the asset or index by either going “long” if they think the price will rise, or going “short” if they believe that it will fall.
When trading on the FTSE100 using derivatives, any fluctuation in the price of the overall index or in the average prices of shares or ETFs, will affect the return for the investor.
How to trade in FTSE 100 ETFs
When you invest in an ETF that is linked to the FTSE 100, you buy into it at the current net asset value (NAV) as opposed to the index price. The NAV is a representation of the overall value of all the shares and securities held by the ETF, minus liabilities such as expenses.
Any movements in the FTSE 100 index price will be reflected in the NAV of the ETF and you will gain or lose money on your investment if you have bought and hold actual shares in the ETF. Alternatively, you can spread bet or use CFDs to trade indirectly in FTSE 100 ETFs, without holding any shares.
How to trade in FTSE 100 shares
Investing or trading in shares from FTSE 100 companies is a more targeted approach, as you will buy stock in a selection of individual companies, rather than being exposed to the price movements of the whole index.
How does the FTSE100 affect the UK economy?
The United Kingdom has the sixth largest economy in the world and it is directly affected by the level of the FTSE indices. Therefore, even if you don’t invest or trade in the FTSE 100 index or live in the UK, its performance and price of it will affect you in some way as falls and rises have global consequences.
If you live or work in the UK then the FTSE100 will affect you more directly because many UK pension funds are tied into UK equities. This means that any change in the index, either positive or negative, will have a knock-on effect on the returns pension holders will receive.
The future of the FTSE 100
The FTSE 100 index is moving into interesting times right now. Big UK oil companies such as Shell and BP are moving into renewable energy supply and investing large amounts of money. How successfully these companies manage this transition is likely to have a significant impact on the overall price of the FTSE100.
If the transition of the big oil companies to renewable energies fails, then the FTSE may shrink as oil prices drop and their value falls as a result. The energy industry is likely to affect all stock markets and indices due to the vast sums of money involved and the huge size of the companies and groups involved.
Another thing to consider when it comes to the future of the FTSE 100 index is that there are some big Anglo-American mining companies listed. These companies may do very well out of the electric vehicle revolution and increased demand for metals such as nickel, lithium, and cobalt.
Finally, the banking sector has always been a big part of the British economy and it still remains that way today. As long as the UK-based banks keep performing well, the FTSE 100 is likely to continue growing over time, but of course – nothing is guaranteed.
What is the FTSE 100, 250, etc?
The Financial Times Stock Exchange (FTSE) indexes are made up of companies that are listed on the London Stock Exchange (LSE). The number indicates how many companies with the highest market caps are listed in each particular index.
How do companies get into the FTSE indexes?
For a company to be included in the FTSE indexes they must first be listed on the London Stock Exchange and be valued in pound sterling (GBP). The company must also meet the minimum requirements for float and stock liquidity.
Can I invest in the FTSE 100, 250, etc?
No, it is not possible to invest directly in the price of any of the FTSE indexes. Instead, you can invest in the individual companies that are listed by buying shares or investing in an exchange-traded fund (ETF). An ETF is a pooled investment that passively tracks an index and invests in stocks that are likely to provide a similar return to the index itself.
What are the other major global indices?
The other major global financial indices include the Dow Jones, S&P 500, and Nasdaq Composite which are related to the New York Stock Exchange (NYSE) and the Nikkei 225 which is related to the Tokyo Stock Exchange (TSE or TYO).
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