You have probably heard the FTSE 100 mentioned in the news. But have you ever wondered what the FTSE 100 is and how it works? Here’s everything you need to know.
What is the FTSE 100?
The FTSE 100 is essentially a list of the 100 biggest UK-listed companies.
‘FTSE’ stands for ‘Financial Times Stock Exchange’. It was originally jointly owned by the Financial Times and the London Stock Exchange. It’s affectionately known as the ‘Footsie’.
Companies listed on the London Stock Exchange are ranked in terms of their market value, or market capitalisation (known as ‘market cap’ for short). The FTSE 100 is a list of the top 100 largest companies in terms of market cap.
For those planning to start investing, building an understanding of the FTSE 100 could be a good place to begin.
How does the FTSE 100 work?
You will probably have heard the FTSE 100 mentioned in the news in terms of a single figure that rises and falls in value.
The combined market cap of the top 100 companies is used to calculate that single figure. These companies are publicly listed, and each company’s value changes depending on its share price.
The figure changes throughout the day while the market is open, just like a share price. The figure published in the evening news is the FTSE 100’s closing value at the end of that day.
Here’s a more in-depth look at how the FTSE 100 works.
Not all companies are eligible to be included in the FTSE 100.
Firstly, a company needs to be a public limited company that is listed on the London Stock Exchange. After that, it must meet the index’s minimum liquidity requirements.
The most important requirement is that the company is among the top 100 companies on the London Stock Exchange in terms of market cap.
Once a company is deemed eligible for the FTSE 100, its weighting needs to be calibrated to see where it places on the index.
The FTSE 100 is weighted by free-float adjusted market capitalisation. This is different from full market cap, as it only takes into account floating stock. So, it only includes shares that are freely available to trade. It does not include restricted or closely held stock.
Both full market cap and free-float adjusted market cap are important to the FTSE 100.
Full market cap dictates whether a company can be a part of the index, while free-float adjusted market cap helps determine its weighting once it is part of the FTSE 100.
The greater a company’s free-float market cap, the bigger its weighting. Companies with a bigger weighting have more influence on how the FTSE 100 performs overall.
You may well be thinking that the largest 100 listed companies will change over time. For this reason, the FTSE 100 and the FTSE 250 – the 250 biggest companies – are reviewed every quarter.
Essentially, the biggest companies from the FTSE 250 can be promoted, while the smallest companies in the FTSE 100 risk being relegated.
Of course, it’s not quite that simple.
A company’s market cap rank needs to fall below 110, not 100, for it to be demoted. Similarly, for a company to be promoted to the FTSE 100, it needs to be ranked at 90 or above.
This is designed to avoid excessive turnover in the index every quarter.
Which companies are in the FTSE 100?
Simply put, the FTSE 100 comprises the 100 biggest companies in terms of market cap that are listed on the London Stock Exchange.
Most people won’t be able to automatically name these companies, but you’ll definitely have heard of a lot of them before!
Here are a few of the bigger companies you may already know:
- HSBC Holdings
- Royal Dutch Shell
- Vodafone Group
- Royal Mail
What is the value of the FTSE 100 index?
If you’re planning to invest in the FTSE 100, you may well want to know what its value is.
The value of the FTSE 100 changes daily – and often even multiple times during any one day.
The FTSE 100 doesn’t have its own share price as such. Instead, it is given a number that represents its value. This represents the overall performance of its components, measured in points.
The index value does not represent the total share price of all its components. Instead, a calculation is used to give the FSTE 100 its total score.
This calculation is: share price x number of shares x free-float adjustment factor
Most of us will struggle to work this out off the top of our heads. Luckily for us, the value is displayed in many places, including on the London Stock Exchange website.
Why is the FTSE 100 important?
The performance of the FTSE 100 is used as an indication of overall market conditions. It changes in response to political or economic events. This is because it responds to increasing or decreasing confidence in the market.
An excellent example of this was the fall in the FTSE 100 by more than 2,400 points from mid-February to mid-March 2020. The start of the coronavirus pandemic prompted one of the largest falls in more than 30 years.
How does the FTSE 100 affect you?
Even if you don’t invest in the stock market, the performance of the FTSE 100 can still have an effect on your finances.
The performance of the FTSE 100 is an important indicator of the general health of the economy. It is also a quick and easy way to gauge financial conditions at any particular point in time.
For example, its performance has an influence on your situation if you pay into a pension scheme, especially if you are close to retirement.
As shown by recent events, a sharp fall in the FTSE 100 could be an indication of an imminent recession, which will negatively affect the economy. This is the reason why it is watched so closely by economists and investors.
Can you buy shares in the FTSE 100?
If you are wondering what scope there is for making money on the FTSE 100, you have a number of options.
You can’t invest in it directly, but you can trade on its performance. One of the most common ways is to invest is through an index tracker fund.
If you want to buy stocks and shares in the FTSE 100 – or the companies in it – you can visit the London Stock Exchange website for more information or check out our top-rated share dealing accounts in the UK to find the best platform to get started.