The FTSE 100 Index Explained in Detail
The FTSE 100 Index, or the Financial Times Stock Exchange 100 Index to give it its full title, goes by many names including the FTSE 100, the FTSE, or even the Footsie. It is a share index of the top 100 companies listed on the London Stock Exchange that have the highest market capitalisation. The FTSE 100 index is seen as the best gauge of the prosperity of businesses that are regulated by company law within the UK.
This index is maintained by a subsidiary of the London Stock Exchange Group known as the FTSE Group. Calculated in real time, it is published every 15 seconds when the market is open. Most of the 100 companies on the FTSE 100 are international companies, and therefore the movements of this index are actually quite a weak indicator of the health of the UK economy. A more realistic indicator of the economy of the UK is the FTSE 250, as the proportion of international companies on that index is much smaller. The components of the FTSE 100 are decided on a quarterly basis in the months of March, June, September and December, and the values that are used to make any change to the index are taken from the close of business on the night before the review is carried out.
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The Companies on the FTSE 100 Index
The companies on the FTSE 100 are representative of just over 80% of the London Stock Exchange’s market capitalisation, and despite the fact that the FTSE All-Share Index is a more comprehensive index, the FTSE 100 is the most widely used indicator of the UK stock market. The companies on the FTSE 100 index have to comply with several requirements determined by the FTSE Group, such as having a full listing on the London Stock Exchange with a denominated price in Euros or Sterling on the Stock Exchange Electronic Listing Service. There are also certain tests that must be met on free float, liquidity and nationality. Known as Blue Chip companies, the 100 businesses are derived from a number of varied industries including chemicals, food and beverages, oil and gas, construction, and many more sectors. Some of the most well-known companies to be found on the FTSE 100 include:
- Coca Cola
- Rio Tinto
- Rolls Royce
A Short History of the FTSE 100
The FTSE 100 index was first established in 1984, with a base level of 1,000. To date, the highest closing value that has been seen on the index is 7,103.98, which was achieved on 27th April 2015, with its previous high having been reached more than 15 years previously during the dot com boom of 1999. Over the years since its conception, the components of the FTSE 100 have changed beyond all recognition, thanks to many takeovers, mergers and disappearing companies, and this has only served to underline the index’s main purpose, which is to perform the function of a gauge of economic market activity. Many of the constituents of the index have also undergone name changes; for example in the case of the Midland Bank, which is now known as HSBC, and British Gas, which is now called BG Group and Centrica.
The level of the FTSE 100 index has an effect upon most people in the United Kingdom, whether or not they are investors. This is because most pension funds are invested in UK equities, and therefore how the index is performing will have a direct effect on the level of return received. The FTSE 100 index also reflects current international and economic events, often falling in response to a fall in markets around the world. The biggest fall in percentage in a single day was on 20th October 1987, the day after “Black Monday”, when it fell by 12.22%. In its entire history, there has only been a single day when the FTSE 100 index has not been calculated. This took place on 16th October 1987, which was the day after a hurricane brought chaos to the south of England, and there were too few market practitioners at work to open the share prices on the LSE trading system.
Choosing the Components of the FTSE 100
It is imperative that the constituent members of the FTSE 100 index reflect the top 100 companies listed on the London Stock Exchange, and therefore changes to the list are made quarterly. However, if a takeover or merger has taken place between these quarterly meetings that would affect the companies on the FTSE 100, the index is changed accordingly. There is a straightforward process for reviewing the FTSE 100, with all of the companies that are listed on the London Stock Exchange and which are eligible for any of the FTSE UK indices being ranked by order of market capitalisation or size. This is calculated by multiplying the number of shares issued by a company by its current share price. A committee comprising independent experts in the markets holds meetings four times a year, in March, June, September and December, to consider which of the companies should be added, removed or kept on the FTSE 100 index. For example, if a company is listed on the FTSE 250 and subsequently moves up to take a place within the top 90 companies, it is permitted to enter the FTSE 100; and conversely, if a company on the FTSE 100 drops below the 111th position, it then falls into the FTSE 250 and is removed from the FTSE 100 listing. A banding system is in place to ensure that each review does not see too many changes, as the index must be kept relatively stable so that investors do not regularly have to make expensive and excessive changes to their investment portfolios. Sometimes, there are no changes made to the index at a review meeting; however, on some occasions, such as during the dot com bubble, volatile market activity meant that many companies entered and left the index at each meeting of the committee.
Other educational materials
- FTSE AIM All-Share Index
- FTSE All-Share Index
- Japanese Exchange Group (JPX)
- LSE – London Stock Exchange
- New York Stock Exchange (NYSE)
Recommended further readings
- “A Study of Arbitrage Efficiency Between the FTSE‐100 Index Futures and Options Contracts.” Draper, Paul, and Joseph KW Fung. Journal of Futures Markets 22, no. 1 (2002): 31-58.
- Evidence from intra‐day FTSE‐100 index and futures data. McMillan, D. G., & Speight, A. E. (2006). Nonlinear dynamics and competing behavioral interpretations: Journal of Futures Markets, 26(4), 343-368.