Market index

What is the FTSE 100?

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If you’re currently investing or just following financial news, you have almost surely heard of the FTSE 100 (or Footsie for short). But do you know what it means? If you’re not familiar with the term, here’s a very simple explanation to help even the most novice investors understand a little bit more about what it is and how it works.

 

It’s got nothing to do with playing with feet under a table!
Despite its playful nickname, the Financial Times Stock Exchange 100, or Footsie is an index which lists 100 companies based in the UK, like Tesco, easyJet, and Sky. The 100 companies are often referred to as ‘blue chip’ and are the largest publicly traded companies listed in the UK – in fact the companies listed in the FTSE 100 make up around 80%1 of the total value of the London Stock Exchange. Simple so far.

1: https://tradingeconomics.com/united-kingdom/stock-market

 

Something you might not know is that there are 101 shares listed in the FTSE 100 due to Royal Dutch Shell having two share classes (A & B). It’s to do with Dutch withholding tax – the income tax they pay to the government when they’re paying dividends to investors. The A shares include a 15%2 Dutch withholding tax and the B shares are not subject to any withholding tax.

2: https://www.fool.com/investing/general/2013/05/28/3-things-to-loathe-about-royal-dutch-shell.aspx

 

The FTSE 100 is a market-weighted index. This means that companies contribute to the aggregate performance based on their size. Large companies like HSBC, who is the biggest member of the FTSE 100, will drive performance of the entire FTSE 100 index much more than a company like easyJet who is one of the smallest members, therefore having less of an impact on the overall performance of the FTSE 100.

 

Although the FTSE 100 is the UK’s leading stock market, it isn’t the best indicator of UK domestic growth or fortunes. The large companies in the FTSE 100 are international groups that generate more than 70%3 of sales overseas.

3: https://www.schroders.com/en/uk/private-investor/insights/markets/how-indexes-rise-when-currencies-fall--explained-in-two-charts/

 

There’s more than one FTSE
In addition to the FTSE 100, there’s the FTSE 250 which tracks the next largest 250 companies on the London Stock Exchange. This is perhaps a better indicator of the UK’s prosperity since medium-sized companies in the FTSE 250 usually generate less sales from global operations.

 

Combine the FTSE100 and FTSE 250 and you get the FTSE 350. Then there’s the FTSE Small Cap, which includes over 280 companies that are smaller than those in the FTSE 100 & 250. Together they are known as the FTSE All-Share.

 

There’s also the FTSE4Good Index which excludes companies and industries involved in harmful activities, such as weapons, deforestation, adult entertainment and gambling, and includes companies with strong ethical standards.

 

FTSE 100 & Volatility
Like any index, the FTSE 100 has its fair share of highs and lows – in fact between 1985 and 2016, the FTSE 100 had 22 years of overall positive growth and 10 years with negative returns4. However, focusing on the long term and overlooking Black Monday in 1987, then the 1995-2000 dot-com bubble, and not forgetting the 2008-09 financial crisis, the index has increased fairly consistently since 1984.

 

4: Forecast Chart, Dec. 2017 - http://www.forecast-chart.com/historical-ftse-100.html

 

 

Why should you care about the FTSE 100?
Unless you deliberately choose to avoid the FTSE 100, you may be invested in the index if you’ve joined a pension scheme or opened an Investment Plan. So, the way the FTSE 100 is doing will have some impact on the performance of your investments, especially if you’re heavily focusing on the UK index. A good way to lower the influence of the FTSE 100 on the total value of your investments can be to spread your money across assets and markets. In other words, instead of favouring the FTSE 100, you could buy a large number of investments (e.g. shares, bonds, property, and commodities) and invest in different indices (e.g. US-based S&P 500 and Japan’s Nikkei 225).

 

Our graph is based on past performance and past performance is not a reliable indicator of future results.

 

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

 

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The comments and opinions expressed in this article are the author's own and should not be taken as financial advice from Wealthify.

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