If you listen to the financial news, check financial websites or read the papers, you’ll hear people talking about the FTSE 100 index – and whether it’s risen or fallen. But what exactly does it measure?
Q. What is the FTSE 100 index?
A. The FTSE 100 index is the index of the 100 biggest companies that are quoted on the London Stock Exchange. They’re often called ‘blue chip’ companies as they are seen as very stable. When it was launched in January 1984, it was given a value of 1,000. The name FTSE (pronounced ‘footsie’) originates from the fact that the company producing the index was originally jointly owned by the Financial Times (the FT) and the London Stock Exchange (LSE).
The FTSE 250 is the index of the next 250 biggest companies and the FTSE 350 is an index that combines the values of the FTSE 100 and FTSE 250.
The FTSE company is now wholly owned by the London Stock Exchange, although it operates as a company in its own right.
Q. How do they decide which companies are in the FTSE 100?
A. In order to be included in the FTSE 100, a company has to be listed or quoted on the London Stock Exchange. The size of a company is based on its market capitalisation (which is worked out by multiplying the number of shares a company has issued and the current price of each share).
That’s not the same as saying it’s an index of the 100 biggest companies in the UK, as some big companies may not be publicly listed companies (PLCs) and so may not be listed at all, while others may choose to list on a stock exchange outside the UK.
Q. Does the FTSE 100 give exposure to a wide range of companies?
A. No, it doesn’t necessarily. At the moment, the index is dominated by companies that are heavily involved in mining, banking, oil and gas and private equity. At other times it’s been dominated by banks and telecoms companies. The FTSE 100 index is weighted, which means that a change in the value of shares in the biggest company have much more of an effect than a change in the value of a small company.
Q. How often is the FTSE 100 index changed?
A. Every three months (March, June, September and December) an independent committee meets to decide whether there should be any changes to the companies that make up the FTSE 100. This meeting happens the Wednesday following the first Friday of the month (phew!).
If there’s a merger or acquisition, changes are made to the FTSE 100 straight away rather than waiting until the quarterly meeting. At the quarterly meeting, if a company that was previously in the FTSE 250 has an increase in its market capitalisation that takes it to 90th position in the FTSE 100 or above, it will be promoted to the FTSE 100. If a company that is in the FTSE 100 sees its fall so it is at 111th position or below, it will be removed from the FTSE 100 index.
Q. What does the FTSE 100’s value represent?
A. The figure quoted in relation to the FTSE 100 reflects what’s happened to the share prices of the companies that make up the index. It doesn’t take into account any return provided by dividends (which are payouts that are made to shareholders from the company’s profits).
Q. Do tracker funds buy all the shares that make up the FTSE 100?
A. Tracker or passive funds are designed to track the performance of a particular stock exchange index. However, they don’t necessarily buy every single company that makes up the index. Some will buy a ‘representative sample’, especially when it comes to smaller companies that make up a comparatively low percentage of the FTSE 100’s value.
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