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Instrument description

One of the most popular index markets of the world is none other than the Financial Times Stock Exchange (FTSE), also referred to as the ‘Footsie.’ The FTSE 100 Index tracks and list 100 of the largest business companies that trade on the London Stock Exchange (LSE). The 100 companies are selected based on their total capitalization. The FTSE 100 Index is an ideal indicator of the economic health of the U.K. The FTSE 100 Index represents more than 80% of the value of the U.K. market on the LSE.

The FTSE 100 Index is one of the most widely followed index markets in the world and provides an opportunity for both traders and investors to try to take advantage of the volatility and liquid stocks. As the stock markets open, the FTSE 100 Index is updated and displayed after every 15 seconds.

History of FTSE 100 Index

The FTSE 100 Index was introduced on January 3, 1984, with a base value of 1000. The FTSE 100 Index is managed by the FTSE Group, which is owned by the London Stock Exchange Group (LSEG). The FTSE 100 Index is similar to the S&P 500 due to its functioning and offering index offerings for global trading.

The FTSE 100 Index saw a tremendous surge in value during the ‘Dotcom Bubble’ in 2000, and the index recorded 7103.98 points. But the FTSE 100 Index saw a major slump in points (as low as 3500 points) during the financial crisis of 2007 that continued for three years and ended in 2010. On March 22, 2018, the FTSE 100 Index made a record by touching 7903.5 points in a day, and the index closed at 7877.45 that day.

The companies in the prominent FTSE 100 Index are reviewed after every quarter, and any changes are made according to the market capitalizations of the companies and their earnings reports. A company may be removed if it failed to comply with the eligibility criteria, and another new company that has attained a certain grade may be included in the FTSE 100 Index. The readjustment of companies is done in March, June, September, and December and usually on Wednesday after the first Friday of the month.

The composition of the FTSE 100 Index mostly includes companies doing business in nearly every sector, be it banking, energy, telecommunication, media, technology, and pharmaceutical. The list of companies in the FTSE 100 Index is also changed due to frequent mergers and acquisitions. A company may not be British but must feature on the London Stock Exchange to be included in the FTSE 100 Index. Some of the popular companies in the FTSE 100 Index are British Petroleum (B.P.), GlaxoSmithKline, Vodafone Group, Shell, HSBC Holdings, Standard Chartered Bank, Unilever, Next, and Diageo.

How the value of FTSE 100 is calculated

The FTSE 100 Index denotes the 100 largest blue-chip companies that operate in the U.K. The FTSE 100 Index is a market capitalization-weighted index where the stocks with bigger market capitalization have a higher weight in the index. The market capitalization is calculated by multiplying the share price with the number of outstanding shares of the company. The market cap of the FTSE 100 Index is £1.814 Trillion. As FTSE 100 Index is a market-cap index, it means that the companies with larger market cap have more influence on the overall value of the index.

The companies get added and removed from the FTSE 100 Index according to their performance and whether the companies fulfill all the regulations or not. The necessary requirements that the companies must comply with to be included in the FTSE 100 Index are

• The company must be listed on the London Stock Exchange
• The company should meet the standards of nationality and minimum liquidity requirement
• The company must issue 20% to the general public for investing opportunities
• The company shares must be valued in Pounds

How to read the price change in FTSE 100

The FTSE 100 Index closing on a high value means that the worth of the 100 companies in the index is increasing. Similarly, the FTSE 100 Index closing at a low value means that the value of the 100 largest companies is decreasing. According to statistics, the FTSE 100 Index returned investors an average 8.3% annually from 2010 to 2019, which was reinvested. Without taking dividends into account, the FTSE 100 Index returned 4.3% annually. The return percentage depends on the index value and the impact of the company on the index price.

When we look at the FTSE 100 Index chart, we notice like most global indices, the FTSE 100 Index has a Bullish trend from July 2019 to February 2020, and the Index value traded between ranges of 7000.0 to 7750.0. The FTSE 100 Index reached the highest value of 7680.0 on January 17, 2020. But there is a considerable Bearish trend from the last week of February, and the FTSE 100 Index reached the lowest value of 4997.4 on March 23, 2020. Since mid-March, the FTSE 100 Index is still trying to recover, but many fluctuations and the index trades at 6148.0 GBP. The Bid price is 6150.8, while the Ask price is 6149.1.

How to trade in FTSE 100

The FTSE 100 Index is one of the most acclaimed index markets and appeals to the traders and investors due to its liquidity and volatility. Like every other index market, the FTSE 100 Index cannot be bought or sold like a stock. Instead, among others you have the option to invest in the FTSE 100 Index through Contract for Difference (CFDs).

CFD is a contract between a trader and broker where one agrees to pay the difference in the price of the asset. CFDs have grown in popularity as it is a derivative financial instrument, which means you do not have to own the asset but speculate on the price of the underlying asset. With CFD, you also have the option of using leverage which is being able to open a relatively larger trading position by only making a small initial deposit in your trading account.

You can also potentially profit from both rising and falling markets through CFDs. For example, if you think the value of the FTSE 100 Index will rise, you will Buy (Go Long), and likewise, if you think the value of the FTSE 100 Index will fall, then you will Sell (Go Short). Due to leverage you can maximize your profits, but equally have high losses if your prediction is wrong, so a risk management strategy may be applied.

What causes the price change of FTSE 100?

Financial markets are always impacted by economic news and events. The FTSE 100 Index is influenced by financial and political news concerning the U.K. and the rest of the European region. The financial announcements such as interest rates, inflation, Gross Domestic Product (GDP) statistics, and U.K. manufacturing numbers influence the value of FTSE 100 Index.

One of the major news and event concerning the U.K. that impacted the FTSE 100 Index significantly was the U.K. decision to leave the European Union following a public referendum in June 2016, which was later popularly dubbed as ‘Brexit.’ The U.K. officially left the E.U at the end of January 2020.

The FTSE 100 Index consists of five of the biggest oil companies, and the frequent change in the global oil prices also affects the value of the FTSE 100 Index. Apart from changes in oil prices, the fluctuations in prices of other commodity prices also significantly affects the market performance of companies present of the FTSE 100 Index, and the FTSE 100 Index consists of 15% commodity based companies. The U.S based companies are affected by the exchange rate of GBP/USD, a weaker Pound means the U.S companies will be worth more in Pounds. Similarly, a rising Pound would mean that the U.S based companies will earn less in the U.K.

Apart from the macroeconomic factors, the market performance and earning report of the 100 companies also matters and has an impact on the share price and, as a result, the overall value of the index. The interest rates and inflation reports from the Bank of England (BOE) also affect the value of the FTSE 100 Index.

The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.