FTSE 100 Index: A Comprehensive Guide

What is the FTSE 100 Index?

The FTSE 100 Index, often referred to as the ‘Footsie’, represents the 100 largest companies by market capitalization listed on the London Stock Exchange (LSE). It is widely regarded as a barometer of the health of the UK’s large-cap economy and a significant global benchmark.

Key Concepts

Understanding the FTSE 100 involves several key concepts:

• Market Capitalization: The total value of a company’s outstanding shares. The FTSE 100 is weighted by this metric.
• Constituents: The 100 companies that meet the index’s inclusion criteria. These can change quarterly.
• Weighting: Companies with larger market caps have a greater influence on the index’s movement.
• Rebalancing: The index is reviewed and adjusted quarterly to ensure it accurately reflects the top 100 companies.

Deep Dive into the FTSE 100

The FTSE 100 is managed by FTSE Russell, a joint venture between the Financial Times and the London Stock Exchange. Its calculation is based on the free float adjusted market capitalization of its constituents. Free float excludes shares held by strategic investors, governments, or insiders, providing a more accurate reflection of tradable shares.

Applications and Significance

The FTSE 100 serves multiple purposes:

• Investment Benchmark: Used by fund managers to compare the performance of their portfolios.
• Economic Indicator: Reflects investor sentiment and the performance of major UK-listed businesses.
• Trading Vehicle: Basis for numerous financial products like exchange-traded funds (ETFs) and derivatives.
• Global Perspective: Many companies in the FTSE 100 derive a significant portion of their revenue from overseas.

Challenges and Misconceptions

A common misconception is that the FTSE 100 solely represents the UK economy. However, many of its constituent companies are multinational corporations with global operations and revenue streams. Therefore, a strong FTSE 100 performance doesn’t always directly correlate with the domestic UK economic situation.

FAQs

Q: How often are the FTSE 100 constituents reviewed?
A: The index is reviewed quarterly, with changes typically taking effect on the third Friday of March, June, September, and December.

Q: What are the largest companies in the FTSE 100?
A: The largest companies vary but often include major players in sectors like oil and gas, pharmaceuticals, mining, and finance.

Q: Is the FTSE 100 price-weighted or market-cap weighted?
A: It is a market capitalization-weighted index, specifically free-float adjusted.