What is the FTSE 100?
The Financial Times Stock Exchange 100 Index, commonly known as FTSE 100, is a benchmark stock market index representing the 100 largest companies by market capitalization listed on the London Stock Exchange (LSE). Such companies are referred to as blue-chip firms, meaning: they are established, financially stable, and have large market capitalizations.
The FTSE 100 is a key indicator of the UK economy’s overall health and is often utilized as a gauge for investor confidence in British business performance. A rising FTSE 100 may indicate increased investor confidence, improved corporate performance, or a favorable economic outlook. Conversely, a declining index may suggest economic headwinds (e.g. political uncertainty, inflation concerns, global market turmoil).
Who controls the FTSE 100?
The FTSE Group, now fully owned by the London Stock Exchange Group (LSEG), is responsible for controlling, maintaining, and calculating the FTSE 100 index. The Group sets the rules and guidelines for which entities are eligible for inclusion in the index and adjusts the list of constituents periodically — ensuring it accurately reflects the 100 largest companies listed on the LSE.
Changes to the FTSE 100’s composition are made quarterly based on market capitalization rankings. Although the FTSE Group calculates and controls the index, its performance is influenced by macroeconomic factors, corporate earnings, investor sentiment, and market trends.
How is FTSE 100 used in investments?
In the stock market, the FTSE 100 is utilized by investors to track the performance of the top 100 companies on the LSE by market cap. It provides a snapshot of the performance of major UK businesses across a variety of sectors, such as energy, banking, pharmaceuticals, and telecommunications. The index can influence investment decisions, portfolio allocations, and serves as a key benchmark for UK-focused mutual funds, exchange-traded funds (ETFs), and other financial products.
How to be included in the FTSE 100?
To be part of the FTSE 100, a company must be listed on the LSE with its shared being denominated in pound and must meet the index’s minimum float and liquidity requirements. Constituents of the FTSE 100 are reviewed quarterly — in March, June, September, and December. Companies are advised to regularly check on the FTSE 100’s constituents for changes.
In addition, companies that fall out of the top 100 by market cap may be removed from the index. In general, the key requirements to be included in the FTSE 100 are:
- Market capitalization —The total market value of the company’s outstanding shares.
- Free-float — Refers to the percentage of a company’s shares that are publicly traded and not closely held by insiders or governments. A minimum of 25% free float is required.
- Incorporate and listing location — Companies must be incorporated in the UK, or if incorporated elsewhere, they must adhere to FTSE Group’s governance and reporting standards.
- Liquidity — This is how frequently a company’s shares are traded. If a company’s stock isn’t traded frequently enough, it can be disqualified from inclusion in the index.
- Currency considerations — The FTSE 100 is a sterling-denominated index. Entities that primarily trade in other currencies are still eligible, but must still report performance in sterling.