Investing 101: The FTSE 100

Updated: May 11, 2020

Welcome back after the Christmas holidays and New Year celebrations. I hope you’re feeling inspired and ready for a year of learning about finance! Let’s get straight into the article:

Ever heard the term ‘FTSE 100’ (pronounced footsie), and wondered what it meant? You’re not alone. Often, you hear financial terms bandied around, whether on the news, in newspapers, or in conversation – yet you have no idea what they mean. Well, by the end of this short article, you’ll know all about the FTSE, and you’ll no longer feel excluded from conservations about finance between all the cool kids!

Okay, on a serious note, the FTSE 100 is a list of 100 of the largest companies (by market capitalisation*) that are listed on the London Stock Exchange.

Undoubtedly, you already have lots of questions. What does FTSE stand for? Why 100 companies? What does market capitalisation mean? And the London Stock Exchange?!?!?!?!?

FTSE stands for Financial Times Stock Exchange. Why? Well, back in January 1984, the primary stock exchange in England, the FT30, was replaced by the FTSE 100. It was 50% owned by the Financial Times (FT) and 50% owned by the London Stock Exchange (SE). For this reason, FT and SE came together and formed FTSE.

Now, there are 100 companies listed on the FTSE 100. They are the biggest companies in England, based on market capitalisation – this is the total of the number of shares that a company issues to investors, multiplied by the company’s current share price.

But, it’s not all bad for smaller companies. There is also the FTSE 250 index, which is composed of the 250 next-largest companies listed on the London Stock Exchange. Together, the FTSE 100 and 250 form the FTSE 350!

So, an example of some of the companies you’ll see listed on the FTSE 100 index are BP and BT, HSBC, Just Eat, Next, and Vodafone. A common assumption is that the FTSE is just made of financial companies such as banks, but this is clearly not the case. The only prerequisite is that the company must report quarterly financial results to the FTSE Group. This is because, for each quarter of the year, the FTSE 100 can change. For example, if a company performs badly in the previous quarter, and its market cap falls, it may be replaced on the list by a company that has seen its share price rise significantly. Companies must also be listed on the London Stock Exchange, in addition to meeting other minimum requirements.

What does the FTSE 100 show us?

Well, it acts as an indicator of wider economic performance. It is also a good reflection of international events – it can drop in response to markets falling around the world, or rise as a result of positive news. For example, after the 2016 Brexit vote, the FTSE 100 fell by about 10%, due to fears of years of market uncertainty and possible recession. The companies listed on the index form about 80% of the total value of all companies listed in the U.K. If the FTSE is up, it generally means that its companies are performing better.

The FTSE 100 started at a base number of 1,000 points when it began in 1984. Now, it is at 7,500. What does this mean? Well, states the following:

The level of the FTSE 100 is calculated using the total market capitalisation of the constituent companies (and the index value) to produce the single figure you see quoted.

Because the total market capitalisation is affected by the individual share prices of the companies, as share prices change throughout the day, so the index value changes. When the FTSE 100 is ‘up’ or ‘down’, the change is being quoted against the previous day’s close.

The figure you see on the evening news is the closing value of the FTSE 100 for that day. The index is actually calculated continuously on every week day (excluding UK public holidays), from 8:00 (market opening) until 16.30 in the afternoon (market close).

If you want to learn more about stock exchanges such as the FTSE 100, check out some articles such as the one here:

Thanks for reading!