FTSE 100

What is the FTSE 100?

The FTSE 100 is a share index comprising the 100 companies listed on the London Stock Exchange (LSE) with the highest market capitalization.

This benchmark index is widely regarded as a gauge of the prosperity and state of the United Kingdom economy and its business sector, as it tracks the performance of the country’s most successful companies.

Techopedia Explains the FTSE 100 Meaning

The FTSE 100 index is owned and managed by the FTSE Group, a wholly-owned subsidiary of the London Stock Exchange Group (LSEG).

Along with the FTSE 100, the FTSE Group oversees many other equity benchmarks that track the performance of securities listed in the LSE, including companies of different sizes and industries. The related indices include the FTSE 250 Index, FTSE 350 Index, FTSE SmallCap Index, and FTSE All-Share Index.

The value of the FTSE 100 index is calculated and published in real-time throughout the trading day, with the level quoted in British pounds sterling.

It acts as a rich source of information about the state and performance of the UK equity market and the broader UK economy.

History of the FTSE 100

The FTSE 100 index was officially launched on January 3, 1984, with an initial base value of 1,000 points.

It was created to provide a more comprehensive and robust representation of the performance of companies traded on the London Stock Exchange compared to previous and narrower indices like the FT30.

Since its inception, the composition of the index has undergone significant transformation and reshuffling over the decades due to a variety of corporate actions like mergers and acquisitions (M&A), changes in the financial situation and valuation of companies that comprised it, and privatization deals.

How the FTSE 100 Works

Rather than using full market capitalization, the FTSE 100 is weighted by free-float adjusted market capitalization for its constituent companies.

The free-float adjustment takes into consideration only the number of shares that are available for public trading (“free float”) rather than all shares outstanding, including those held by insiders or strategic investors.

This means that the impact of a stock‘s price movement on the index is proportional to the size of free-floating instruments rather than its full theoretical market capitalization.

The index is reviewed quarterly to determine if any changes should be made to its constituent base and weightings based on how their market caps have fluctuated.

As of April 30, 2024, the 5 largest constituents of the FTSE 100 index by weight are:

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At the same time, The FTSE Group website reports that the dividend yield of the index stood at 3.72%.

FTSE 100 Sectors

One of the key characteristics of the FTSE 100 is that it provides exposure to a wide range of industries, sectors, and segments of the UK economy.

As of April 30, 2024, some of the largest sectors represented by weight in the index include:

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Other major sectors with notable weightings in the index are Food, Beverage and Tobacco, Personal Care, Drug and Grocery Stores, Basic Resources, and Media, among others.

How Is the FTSE 100 Calculated?

The FTSE 100 uses an arithmetic mean share weighting calculation methodology. The actual index value is computed by:

The divisor is adjusted over time to maintain continuity in the index whenever there are changes due to corporate actions like mergers, acquisitions, delistings, etc. This allows for consistent historical comparisons of the index level over time.

What Is the FTSE 100 Share Price?

Now that we have discussed the meaning of the FTSE 100, you may wonder how is its value calculated.

It is worth noting that the FTSE 100 itself does not have a share price measured in currency terms like a typical stock listing.

Rather, its level is quoted as an index value represented by a number of points that reflect the overall performance of its components based on their individual market capitalizations and share prices.

For example, if the FTSE 100 is quoted at 7,500 points, this does not mean that the aggregate share prices of all constituents add up to 7,500 British pounds.

The points are simply a numerical representation of the value of the index derived from the unique methodology used to calculate it.

How to Trade the FTSE 100?

While investors cannot directly invest in or trade the FTSE 100 index itself, several popular products and investment vehicles track the index’s performance and provide exposure to its price action.

This is a summary of the most common assets used to add the FTSE 100 index to a given investment portfolio:

FTSE 100 Trading Hours

The stocks of the companies that constitute the FTSE 100 index can be traded on the London Stock Exchange from 8:00 a.m. to 4:30 p.m. London time on weekdays, excluding holidays.

However, many derivative products that track the FTSE 100, such as futures, CFDs, and certain ETFs, can often be traded outside of the regular hours of the LSE.

For example, FTSE 100 index futures might trade nearly 24 hours a day by using the time zones of different regions – New York, London, and Singapore.

FTSE 100 Benefits and Challenges

Now that we have a clear definition of the FTSE 100, we should move on to the key benefits, advantages, and challenges associated with trading it compared to other indexes or individual UK equities.

Other FTSE Indices

While the FTSE 100 is the most widely followed, various other major indexes are also managed and overseen by the FTSE Group, including:

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There are also sector and industry-specific FTSE indices as well as ESG/ethics-based indexes, like the FTSE4Good series.

The Bottom Line

The FTSE 100 represents a real-time indicator and credible barometer of the performance of the UK’s largest and most prominent public companies. The diversity of its 100 constituents, which operate in different industries and economic sectors, provides an efficient way to gain diversified exposure to the UK equity market.

Although the index is heavily reliant on a handful of large multinationals, it is still considered a relevant benchmark of the UK’s economy.

High liquidity, track record, and wide availability of tradable products have solidified the FTSE 100 as one of the world’s most followed and analyzed stock indices.

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