The basic principles of the FTSE 100 index
Within the London Stock Exchange there are various indexes including the FTSE 100 index. A stock market index is essentially a grouping of companies. The make-up of an index is determined by the total market value of a company’s shares. The indexes on the UK stock market are called the FTSE (Financial Times Stock Exchange) indexes. The FTSE indexes are managed by FTSE Russell who are a subsidiary of the London Stock Exchange Group.
You may often see the FTSE 100 referred to as the Footsie 100. They are the same thing.
What is it?
The FTSE 100 companies are quite simply the 100 largest companies trading on the UK stock market (the London Stock Exchange). When we say largest, we mean in terms of the company’s total market value. The total market value of a company is calculated by multiplying the share price of the company by the total number of shares they have issued. Issued shares (often called shares in issue) are the total number of shares that the company has sold to shareholders.
For example, a particular company may have 2 billion issued shares and their shares are currently trading on the stock market for a buy price of £2. This company would have a total market value of £4 billion. You will often see this referred to as the market capitalisation of the company.
Why does the FTSE 100 index go up and down?
We will often hear on the news that the FTSE 100 is up or down so many points today. We also see headlines such as £20bn wiped off the FTSE 100 today. So just what does this mean?
The share prices of the companies comprising the FTSE 100 index will go up or down on any given day. As the share prices of the individual companies go up and down it causes the overall FTSE 100 index to move up and down. This is because the total value of the FTSE 100 is determined by the total value of the companies who make-up the index. The index points are calculated using a formula which takes into account the size of the company (in terms of market value). What this means is the index is weighted. Therefore, movements in the share price of a larger company will have a greater effect on the total value of the index than that of a smaller company.
When we hear headlines such as £20bn wiped off the FTSE 100 today it basically means that the total market value of all of the FTSE 100 companies added together has reduced by £20bn today compared to yesterday. This could be down to a few big declines in the share price of the largest and therefore most heavily weighted companies. Or it could be an aggregate effect of lots of companies in the index seeing their share price fall.
Who are the FTSE 100 companies?
The list of FTSE 100 companies is managed by a subsidiary organisation of the London Stock Exchange. The group is made up of a multitude of multinational companies, as you might expect for the largest companies on the stock market.
As the companies in the index are internationally focused companies the index tends to be more a reflection of the strength of the global economy than the UK economy.
Here are the top five companies (in terms of market cap*):
- Shell: £176.8bn
Multinational oil and gas heavyweight.
- Astrazeneca: £170.6bn
Pharmaceutical company with a global reach.
- HSBC: £126.2bn
Global banking giant that you will all be familiar with.
- Unilever: £101.3bn
Owner of many household names such as Ben & Jerry’s, Dove and Helmann’s
- BP: £92.7bn
Another multinational oil and gas company.
Has the FTSE 100 gone up or down?
From the beginning of 2013 to the end of 2023, the index has on average delivered an annual total return of 7%.
As always it is important to remember that investing requires a long-term view.
Keeping it simple
So remember, the FTSE 100 is just an index of the 100 largest companies on the UK stock market. When we say largest, we mean in terms of market capitalisation (or market value) which is share price multiplied by the number of issued shares.
If you’re keen to learn more make sure you check out the rest of our website or grab a copy of our free Beginner’s Guide to Investing in the Stock Market.
*Data correct as of 30/09/2023 (Source: London Stock Exchange)
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