If you’ve watched or read anything about the stock market, you’ve probably heard of the FTSE 100 index. But what is it? And how do you invest in the FTSE 100? Here’s what you need to know.
What is the FTSE 100?
Before determining how to invest in the FTSE 100, let’s take a look at what it actually is.
The FTSE (Financial Times Stock Exchange) is a share index that takes into account the performance of the top 100 companies in the UK. It was previously owned by Financial Times and the London Stock Exchange, which is where its name comes from.
The FTSE share index is a single points figure, consisting of the collective performance of every company that makes up the index. This means that if the share price of one member in the index falls, it won’t necessarily mean that the FTSE 100 will end the day in the red.
When the FTSE 100 was launched in 1984, its collective points figure was slightly above 1,000. In the decades since its launch, the value of the index has soared. The FTSE 100 reached an all-time high of 7,877.45 points on 22 May 2018, though it has since fallen due to the economic fallout of Covid-19.
Which companies are in the index?
Companies that make up the FTSE 100 are ranked by the total value of their shares. Total share values are also referred to as a ‘market cap.’
As share values rise and fall, organisations that make up the index can change too. For example, in June 2021, broadcaster ITV entered the FTSE 100, replacing engineering company Renishaw.
Big names that are currently constituents of the FTSE 100 include Aviva, BP, Tesco, GlaxoSmithKline and Royal Mail. For a full list, you can visit the London Stock Exchange website.
How can I invest in the FTSE 100?
If you want to invest in the FTSE 100, there are two ways to do so.
Firstly, you can invest directly in one company, or a handful of companies, that make up the FTSE 100. To do this, you can open a share dealing account and then buy individual investments through a platform.
Alternatively, if you want to invest in the whole FTSE 100, then you can do this using an index tracker fund. Specific index funds, such as the HSBC FTSE 100 or the Vanguard FTSE 100 Index Unit Trust will track the FTSE 100. When the index rises, so does your investment (and vice-versa when the index falls).
To learn more about these two options, see our article on whether you should invest in individual shares or funds.
Before I invest in the FTSE 100, what should I look out for?
As the FTSE 100 contains the top 100 performing companies in the UK, it is, unsurprisingly, UK-focused. While this isn’t necessarily a problem, it does mean that should you choose to invest in it, you are heavily relying on the performance of the UK economy. Many investors would instead recommend holding shares across a number of different countries in order to diversify your portfolio.
That’s because if the UK economy slums more than the rest of the world, you’ll probably lose out. Whereas if you have exposure to other markets, you’ll be less impacted.
It’s also worth knowing that a FTSE 100 tracker fund won’t contain any bonds. Again, this isn’t a problem in its own right, but if you do choose to solely invest in the FTSE 100, you won’t have any bonds to cushion you from any unexpected volatility. That’s because bonds are traditionally more stable than shares in the short term, though they generally offer lower returns.
More generally, if you are new to investing, it’s important to understand that investing involves risk and that the value of your investments can go down. To help you, see our beginners guide that outlines how to invest in stocks.
What is the FTSE 250?
The FTSE 250 is another share index, comprising the 101st to the 350th largest companies in the UK. If a company leaves the FTSE 100 index, it will generally enter the FTSE 250.
Many analysts feel that the FTSE 250 gives a better indication as to the overall performance of the UK economy. That’s because the FTSE 250 encompasses a larger number of companies across a wider range of sectors.
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