The FTSE 100: What does it all mean?
We all hear about the FTSE 100 every day on the news, and read about it in the papers – but what exactly is the FTSE 100? What does the figure we see quoted every day actually mean, and why should we be interested?
The FTSE 100 is an index composed of the 100 largest companies listed on the London Stock Exchange (LSE). These are often referred to as ‘blue chip’ companies, and the index is seen traditionally 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 LSE (hence FTSE - FT and SE) and the fact it contains 100 companies. The FTSE 100 is now maintained by the FTSE group which is a wholly owned subsidiary of the London Stock Exchange . Although the FTSE 100 is the most famous index the company produces, FTSE Group also calculates over 100,000 other indices, covering markets around the world, every day.
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 1,000.0. 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. A fair number of constituents have changed their names too – remember Midland Bank (HSBC), Commercial Union Assurance (Aviva),Reckitt & Colman (Reckitt Benckiser) and British Gas (now BG Group and Centrica).
FTSE ins and outs
Of course, the index must be changed to make sure it still reflects the top 100 companies listed on the LSE – if it wasn’t, we would still have an index containing companies such as Trafalgar House and Rowntree Mackintosh. These changes happen once a quarter, although if there are takeovers or mergers in between these times affecting companies in the FTSE 100, the index will be changed accordingly.
The process for reviewing the index is straightforward – all companies listed on the LSE and eligible for the FTSE UK indices are ranked in order of their size, or market capitalisation (calculated by multiplying the number of issued shares of a company and the current share price).
A committee, made up of independent market experts meets in March, June, September and December and considers which companies should be allowed into the FTSE 100. Simply, if a company is in the FTSE 250 and climbs into the top 90 companies, it can enter the FTSE 100. If a FTSE 100 company falls to 111th position or below in the rankings, it will fall into the FTSE 250. So it is not just a case of picking the largest 100 companies and drawing a line – a banding system is in place.
These ‘bands’ exist so there are not too many changes at each review – the index needs to be kept fairly stable for investors not to have excessive and expensive changes to make to their portfolios. On some occasions, no changes to the FTSE 100 have been made at a review, but during the dot com boom, market activity meant that large numbers of companies could enter and leave the index when changes were made. The changes made at each quarterly review are often covered by market reporters in the business sections of the national press.
FTSE ups and downs
The figure seen on the evening news is, in fact, the closing value of the FTSE 100. The index is actually calculated every 15 seconds 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 tumble in response to markets falling around the world. The largest one-day percentage fall was on 20 October 1987 at 12.22%; this was the day following ‘Black Monday’.