Trading BasicsAug 05, 20265 Min

What Is the FTSE 100 and How Does It Work?

While exploring international markets, particularly in the UK, investors often encounter the term FTSE 100 index early on. It raises a basic, but important question: is it a single stock, a list of companies, or something more expansive? It cannot be purchased directly. Even so, the FTSE 100 remains central to how the UK equity market is interpreted and discussed.

With global investing now far more accessible than before, indices such as the FTSE 100 have taken on a clearer role as reference points for tracking market performance. Understanding its structure makes it easier to see how large UK companies move within the economy, and, just as importantly, how investors follow and interpret those movements.

What Is the FTSE 100 Index?

The FTSE 100 index tracks the 100 largest companies listed on the London Stock Exchange, with inclusion that is determined by market capitalization, which is almost the total value of a company’s outstanding shares. In practice, it serves as a reference point for assessing how large-cap companies in the UK are performing overall.

Rather than focusing on any one company, it captures the combined performance of a group of other major businesses. The companies included come from a range of sectors, including energy, banking, pharmaceuticals, and consumer goods.

Some widely known companies that have historically been part of the index include:

• BP (energy)
• HSBC (banking)
• Unilever (consumer goods)
• AstraZeneca (pharmaceuticals)

The overall composition does not remain fixed, but it does shift gradually, as it is influenced both by company size and the broader state of market conditions.

Why the FTSE 100 Holds Relevance

The FTSE 100 is often used as a reference point. That comes down to what it represents—it tracks the performance of the UK’s largest listed companies, which, in practice, gives a quick read on how the wider market is moving.

• As a market indicator, the index tends to move in ways that signal shifts in overall economic sentiment, rather than just isolated changes.
• It also functions as a benchmark, with investment funds that are frequently measuring their own performance relative to it rather than in isolation.
• Beyond that, it is used as a tracking reference, helping investors read shifts across sectors and see how different companies are weighted within the index.

A key point to consider is that a large number of FTSE 100 companies generate a significant portion of their revenue outside the UK. As a result, the index does not act as a purely domestic measure of the UK economy, since a considerable part of its performance is tied to international markets as well.

How the FTSE 100 Is Calculated

The FTSE 100 is a market-capitalization-weighted index. This means that companies that have a larger market value will have a bigger influence on the index movement.

Key Components of Calculation

A significant price movement in a large company such as BP can influence the index more than the combined effect of multiple smaller firms. As a result, the FTSE 100 does not operate on an equal-weight basis; in reality, its overall direction is largely shaped by a relatively small set of high-value companies.

How Companies Enter or Leave the FTSE 100

The FTSE 100 is reviewed quarterly (every three months). Companies can move in or out based on their market capitalization ranking.

The Process

• Companies ranked within the top 90 are typically included.
• Companies falling below rank 110 may be removed.
• Those between 90 and 110 may remain, depending on prior inclusion.

This process ensures the index continues to reflect the largest listed companies at any given time.

What Moves the FTSE 100?

Several factors can influence how the FTSE 100 behaves:

1. Company Earnings

Strong or weak earnings reports from major companies can shift the index.

2. Global Economic Conditions

Since many FTSE companies operate internationally, global events (like oil prices or currency changes) can have an impact.

3. Currency Movements

The value of the British pound plays a role. A weaker pound can sometimes benefit multinational companies that earn revenue in other currencies.

4. Sector Trends

Industries like energy or banking often carry significant weight. Changes in these sectors can influence the overall index direction.

FTSE 100 vs Other UK stock market indexes

The FTSE 100 is just one part of a broader set of UK stock market indexes.

The FTSE 250, for example, may sometimes reflect the domestic UK economy more closely than the FTSE 100, due to less international exposure.

Can the FTSE 100 Be Invested In?

The FTSE 100 itself cannot be bought directly, since it is just an index.

However, exposure can be achieved through instruments that track it, such as:

• Exchange-traded funds (ETFs)
• Index funds
• Derivative products (higher risk category)

These instruments aim to replicate the performance of the FTSE 100, though tracking accuracy and costs can vary.

Key Statistics About the FTSE 100

• The FTSE 100 represents around 80% of the total market capitalization of companies listed on the London Stock Exchange.
• A significant portion of FTSE 100 revenues, now estimated at around 80%, comes from outside the UK, highlighting its strong global exposure.

These figures help explain why the index may behave differently from domestic economic trends.

Advantages and Limitations of the FTSE 100

Advantages

• Provides a simple benchmark for large UK-listed companies
• Offers exposure across multiple sectors
• Reflects global business activity, not just domestic performance

Limitations

• Heavily influenced by a few large companies
• Does not fully represent smaller UK businesses
• May not align directly with UK economic conditions

How Investors Use the FTSE 100

The FTSE 100 can serve different roles depending on the investment approach:

• Reference point: Used to compare portfolio performance
• Diversification tool: Potential exposure to multiple industries through one index
• Market signal: Helps interpret broader economic sentiment

In many cases, it is used alongside other indices to build a more balanced view of the market.

Final Thoughts on FTSE 100 Index

The FTSE 100 index functions as a widely used reference for understanding large-cap companies in the UK, but its global exposure means it reflects more than just the domestic economy. Its structure, weighting system, and periodic rebalancing all influence how it behaves over time.

Access to such indices can support broader market exploration, especially when looking at international exposure across regions like the US and UK. Platforms like Dealing.com provide access to multiple exchanges and a wide range of assets, allowing markets to be explored based on individual goals and comfort levels and should not be regarded as a recommendation to invest in any particular financial instrument or market.

Disclaimer: This content is for educational purposes only and does not constitute investment advice, personal recommendations, or a solicitation to buy or sell financial instruments. All investments involve risk, including potential loss of capital. Investors should consult professional financial advisors and consider their personal circumstances before making any investment decision.