What does the performance figure we see quoted every day actually mean?
The FTSE 100 is an index composed of the 100 largest (by market capitalisation) companies listed on the London Stock Exchange (LSE). These are often referred to as ‘blue chip’ companies, and the index is seen as a good indication of the performance of major companies listed in the UK.
The FTSE 100 name originates from when it was owned 50/50 by the Financial Times and the London Stock Exchange (LSE), hence FT and SE makes FTSE. It also references its make-up of 100 companies.
In the UK market, the other FTSE UK indices include the FTSE 250 (the next 250 largest companies after the FTSE 100) and the FTSE SmallCap (the companies smaller than those). The FTSE 100 and FTSE 250 together make up the FTSE 350 — add in the FTSE SmallCap and you get the FTSE All-Share.
The FTSE 100 was launched on 3 January 1984 and had a start value of 1,000.00. Since then, the make-up of the index has changed almost beyond recognition, with mergers, takeovers and disappearing companies, underlining the index’s purpose of acting as a barometer of market activity. It is changed every quarter to make sure it still reflects the top 100 companies.
The level of the FTSE 100 is calculated using the total market capitalisation of the constituent companies (and the index value) to produce the single figure you see quoted.
Because the total market capitalisation is affected by the individual share prices of the companies, as share prices change throughout the day, so the index value changes. When the FTSE 100 is ‘up’ or ‘down’, the change is being quoted against the previous day’s close.
The figure you see on the evening news is the closing value of the FTSE 100 for that day. The index is actually calculated continuously on every week day (excluding UK public holidays), from 8:00 (market opening) until 16.30 in the afternoon (market close).
The level of the FTSE 100 affects most people in the UK even if they don’t directly invest for themselves: as pension fund holders, whose investments are probably invested in UK equities, how well the index is performing directly affects the return they will receive.
The FTSE 100 is also a pretty good reflection of economic and international events – often it will drop in response to markets falling around the world.