FTSE 100 Index

Overview and History

The Financial Times Stock Exchange 100 Index, commonly known just as the FTSE 100 Index and informally named the “Footsie” is a share index that features 100 of the top companies that are publicly traded on the London Stock Exchange (LSE) according to their market capitalization.

The FTSE 100 is maintained by the FTSE Group which is a wholly-owned subsidiary of the LSE. The FTSE was launched in 1984 and it originated as a joint venture between the LSE and the Financial Times. The companies that are listed on the FTSE 100 are the largest 100 qualifying United Kingdom-based companies according to their full market value.

The FTSE 100 represents over 80% of the overall market capitalization of the LSE and the index is considered equally important alongside the Dow Jones Industrial Average (DJIA) and the Standards and Poor’s (S&P) 500 as a crucial indicator relating to the overall market’s performance.

Composition of the FTSE 100

Since its launch in 1984, the FTSE 100’s makeup has transformed to reflect mergers, acquisitions, entering, and exiting of companies, with its overall function serving as a benchmark of market activity.

While the FTSE 100 consists of UK-based companies, it is not necessary for a company to strictly be a British company to be featured in the FTSE 100 or be listed on the LSE. Many companies that are listed on both the LSE and FTSE 100 are foreign-based or they conduct most of their business abroad.

The value of the pound is an important factor because a weakened pound means that a United States dollar-based company is worth a lot more in pounds. The opposite is true as well, with a rising pound meaning that companies that carry out business in Europe will earn less in the United Kingdom.

The components of the FTSE 100 are reviewed quarterly to ensure that only the companies with the highest market capitalization are featured.

Investing in the FTSE 100

One of the most popular ways to invest in the FTSE 100 is to register a share dealing account with trusted, regulated financial services provided such as a stockbroker. The different ways through which investors can interact with the FTSE 100 include some of the following:

• Exchange-traded funds (ETFs)
• Individual Stocks

ETFs

When investors purchase ETFs, they spread their capital across all 100 companies that are listed on the index. One of the most typical forms of an FTSE 100 ETF relates to a weighted tracker. This tracker reflects the make-up of the overall FTSE 100, and they include the Vanguard FTSE 100 UCTIS ETF and the iShares Core FTSE 100 UCITS ETF. By investing in an ETF, investors diversify their portfolios, and they mitigate the risks involved with investing in a single sector or share.

Individual Stocks

Investors can select individual stocks from the FTSE 100 believing that they will appreciate. Once they reach a certain price, the investor sells their stocks for a profit. FTSE 100 stocks are popular because they tend to pay higher dividends.

Trading the FTSE 100

When trading the FTSE 100, traders have the following options:

• Cash Indices
• Index Futures

Cash Indices

When traders trade cash indices, also known as spot indices, it means that they purchase/sell the stock at the current price. Cash indices are one of the best ways for short-term traders to gain returns. However, a downside to trading cash indices is that there are overnight fees charged when traders keep their positions open for longer than a trading day.

Index Futures

This is ideal for long-term traders because the overnight fees are included in the spread. Index futures involves traders agreeing to trade the index at a predetermined price at a specific date set in the future.

Factors that drive the FTSE 100’s Price

Several factors drive the prices of the stocks listed on the FTSE 100, these include:

• Economical events including Brexit and the 2016 referendum, caused the FTSE 100 to move inversely with the British pound.
• News reports and releases tend to cause periods of high volatility in all markets, including the FTSE 100, especially when it involves certain industries or direct constituents of the FTSE 100.
• Exchange rates can affect the constituents of the FTSE 100 because there are companies that earn their income in other currencies.
• Earnings reports – when there are changes to the constituents’ valuations, it can affect the index price depending on the weight that a certain stock has on the FTSE 100.
• Prices on commodities affect the overall price of the FTSE 100 because 15% of companies that are featured on the index are commodity stocks.

Because of these driving factors, traders are urged to use a combination of technical analysis and fundamental analysis before they trade the FTSE 100. In addition, traders must ensure that they have a solid trading plan and risk management strategy which they must follow without fail, ensuring that they can be safeguarded against different risks.

Tips on Trading the FTSE 100

Some tips that investors and traders can use when they decide to trade the FTSE 100 include:

• Choose a trading style according to the trader’s unique trading objectives and needs. There are four main trading styles namely scalping, day trading, swing trading, and position trading. Each of these trading styles indicates the trading frequency and how long positions are kept open.
• Stay updated on the latest news, especially if it involves a company that the trader is interested in or that they are actively trading. Traders are urged to use an economic calendar to remain updated with the latest events from around the globe.
• Use trading alerts as the trader can set certain criteria for the FTSE 100 price, allowing the trader to be notified of any changes or once the criteria are fulfilled.
• Use trading signals by using different FTSE 100 charts to identify trends.
• Use technical analysis alongside indicators as part of a comprehensive trading strategy.
• Study charts as well as price action to gauge the market sentiment and to get an idea of the direction in which the market may move.