The Financial Times Stock Exchange 100, commonly known as the FTSE 100, FTSE or more casually the ‘Footsie’, is one of the most recognised components of the UK's financial market. To investors at home and around the globe, the FTSE 100 is a barometer of UK market sentiment, an indicator of economic trends and a baseline for investment strategies.
WHAT IS THE FTSE 100?
The FTSE 100 index, launched on 3 January 1984, comprises the 100 largest companies listed on the London Stock Exchange (LSE) by market capitalisation. These companies span various sectors, including finance, oil & gas, pharmaceuticals, consumer goods and technology, making the index a diversified representation of the UK economy's industrial strength.
Market capitalisation, the primary criterion for a company's inclusion in the index, is calculated by multiplying the current share price by the total number of shares outstanding. This metric ensures that the index reflects the value that investors place on these companies. As such, the FTSE 100's movements are watched closely by investors as they adjust their portfolios in response to changes in the market.
HOW DOES THE FTSE 100 AFFECT INVESTORS?
For individual investors, the FTSE 100 serves multiple roles. It can be a benchmark against which they can measure the performance of their investments. If an investor's portfolio outperforms the FTSE 100, they can infer that their investment strategy is sound. Conversely, underperformance might prompt a re-evaluation of their approach.
The index also acts as a guide for investors looking to diversify their portfolios. By investing in funds that track the FTSE 100, investors can spread their risk across multiple sectors and companies. This diversification can protect against significant losses that might occur if an investment is concentrated in a single stock or sector.
Furthermore, the FTSE 100 influences investor sentiment. Sharp rises may signal confidence in the economy, encouraging investment, while significant drops can indicate economic challenges, leading to caution among investors.
KEY SECTORS AND COMPANIES IN THE FTSE 100
The FTSE 100 is home to some of the world's most well-known and influential companies. Financial services firms like HSBC Holdings and Barclays play a significant role in the index, reflecting the UK's status as a global financial hub. The index also features major pharmaceutical companies such as AstraZeneca and GlaxoSmithKline, whose products and research have global reach.
Energy giants like BP and Royal Dutch Shell highlight the UK's importance in the global energy market. Meanwhile, consumer goods companies, including Unilever and Diageo, show the diversity and breadth of the UK's economic activities.
These companies, along with others in the FTSE 100, are not just leaders in the UK market. They are global players and their performance on the LSE reflects their worldwide operations and challenges.
TRACKING AND TRADING THE FTSE 100
Investors can engage with the FTSE 100 in several ways. Many opt for direct investment in the shares of companies listed in the index. Others prefer index funds or exchange-traded funds (ETFs) that aim to replicate the performance of the FTSE 100, offering a more diversified investment approach without the need to buy shares in each company individually.
Investing in the FTSE 100 through active funds can allow investors to leverage the expertise of seasoned fund managers who aim to outperform the index by making strategic selections and adjustments, capitalising on market opportunities and navigating risks with a hands-on approach. But this also carries the risk of underperforming the index.
Additionally, derivatives like futures and options contracts based on the FTSE 100 enable investors to speculate on the index's future movements. These financial instruments can be used for hedging against potential losses or for speculative purposes, providing investors with various strategies to navigate the market.
THE GLOBAL CONTEXT
The FTSE 100's composition of multinational companies means it is not solely reflective of the UK economy. Many companies in the index derive a significant portion of their revenues from abroad, making the index sensitive to global economic trends, exchange rates and international political events. This global exposure is a double-edged sword; it provides diversification benefits but also introduces volatility from factors beyond the UK's borders.
This Trustnet Learn article was written with assistance from artificial intelligence (AI). For more information, please visit our AI Statement.