I doubt there’s a single adult in the UK who hasn’t heard of the FTSE 100. After all, it regularly features in the mainstream news.
There are a number of ways a company can get into the ‘Footsie’. But one in particular highlights the stock market’s enormous wealth-building potential for investors. Especially those following the long-term approach to investing we advocate here at The Motley Fool.
The FTSE 100 is an index of the biggest 100 companies listed on the Main Market of the London Stock Exchange.
In this context, biggest doesn’t mean revenues, or profits, or number of employees. It means ‘market capitalisation’. Market cap is calculated by multiplying a company’s share price by the number of shares it has in issue.
For example, top-ranked firm AstraZeneca currently has a share price of £103 and 1.55bn shares in issue. Therefore, its market cap is £160bn.
The FTSE 100 isn’t the UK’s only index. The FTSE 250 (mid-cap index) contains the next biggest 250 companies.
Then there are the FTSE SmallCap and FTSE Fledgling indexes. And hundreds more companies on the less-regulated Alternative Investment Market (FTSE AIM).
All these indexes are based on market cap.
The Footsie’s predecessor
Before the FTSE 100 was established in 1984, the UK’s previous flagship index was a very different animal.
The FT30 — which still exists today but is rarely quoted — is an index of 30 equally weighted companies. It was designed to represent the breadth of the UK economy. And its constituents tend to change infrequently.
In contrast to the FT30, the market-cap, rules-based FTSE 100 gives any company of sufficient size automatic entry into today’s best known UK market index.
And, as I mentioned earlier, there are a number of ways this can happen.
From private to public
A large private- or state-owned company may decide to list on the stock market. For example, Royal Mail Group (recently renamed International Distributions Services) joined the market in 2013.
Once venerated for the speed and magnificence of its stagecoaches, it galloped straight into the FTSE 100.
There are also instances when a big company on an overseas stock exchange decides to move its listing to London. In the same year Royal Mail joined the market, Coca Cola HBC switched its listing from Greece to the UK.
One of its parent company’s biggest bottling partners, Coca Cola HBC fizzed into the FTSE 100 before you could say ring-pull.
A big merger/acquisition event is another way a company can enter the top index. Not so long ago, betting and gaming group Entain was a FTSE 250 company called GVC Holdings.
In 2018, it bought rival and fellow mid-cap firm Ladbrokes Coral. This transformative acquisition catapulted it into the FTSE 100.
The above routes into the Footsie don’t particularly highlight the enormous wealth-building potential for investors I referred to earlier.
However, there’s one route that does. Some companies begin their lives on the stock market as small acorns. And by growing over time, move up through the indexes, and ultimately become mighty oaks of the FTSE 100.
Halma is an engineering group, focused on safety, environmental and health technologies. It entered the FTSE 100 in 2017.
I can’t tell you what its share price and market cap were when it listed on the London Stock Exchange 50 or so years ago. That information is lost to me in the pre-internet mist of time!
However, I can tell you that in 1994, the Independent reported: “A £10,000 investment in the shares any time between 1974 and 1976 would now be worth more than £3.7m.”
The share price was £2.27 at the time of the article. Today, it’s £18.50. I’ll leave you to do the maths on how much further the £3.7m would have swelled since 1994.
Halma’s return is spectacular, but it’s not the only company to have delivered life-changing wealth for long-term investors. Indeed, big winners are more common than you perhaps imagine.
What are the chances?
A study by asset manager Schroders of the decade to the end of December 2021 found that of 915 UK stocks (that began the period with market caps of £150m+) 6.9% — or 1 in 15 — delivered 10-fold or higher returns for investors.
That tells me the chance of bagging a seriously wealth-enhancing stock — even over a one-decade holding period, let alone two or three, or an investing lifetime — is way, way better than finding a needle in a haystack.