Overview of the FTSE 100 Stock Market Index

The FTSE 100 Stock Market Index (referred to as the ‘footsie’), is an index made up of 100 companies listed on the London Stock Exchange with the highest market capitalization. Like the S&P 500, it is, therefore, a capitalization-weighted index.

The FTSE is one of the world’s most quoted indices as it measures the performance of the largest companies based in the UK – one of the world’s leading economies.

Companies that make up the FTSE 100 Stock Market Index

Below is a list of the largest companies on the FTSE 100 in descending weight*.

HSBC Holdings (8.00%) AstraZeneca (2.45%) SABMiller (1.88%)
Vodafone Group (5.76%) BG Group (2.40%) Standard Chartered (1.78%)
BP (5.46%) Barclays (2.26%) Prudential (1.73%)
Royal Dutch Shell A (5.02%) BHP Billiton (2.24%) National Grid (1.71%)
British American Tobacco (4.07%) Rio Tinto (2.11%) Tesco (1.68%)
Royal Dutch Shell B** (3.52%) Unilever (2.02%) Lloyds Banking Group (1.67%)
Diageo (2.98%) Reckitt Benckiser (1.89%) BT Group (1.53%)

*As at 23rd September 2013

Understanding the importance of the biggest names in the FTSE (and all stock indices for that matter) is essential when trading as price movements in these shares are likely to have the biggest impact.

The top ten companies account for more than 40% of its value. Four of the top ten stocks are oil and gas companies – Royal Dutch Shell A & B, BP and BG Group (as of September 2013). Therefore an informed FTSE trader will be up-to-date on any major events in the energies industry as well as oil prices and production news.

**Royal Dutch Shell has class A and B shares. They are very similar in terms of what they offer the shareholder. The difference is that Class A shares are subject to a 15% Dutch withholding tax on dividends as these shares were originally part of the Dutch entity of the company before the two merged. Both types of shares are quoted on the FTSE 100 – RDSA and RDSB.

Admission to the FTSE

There is a quarterly review of the companies in the FTSE 100 and membership of the index can change at this review. The FTSE 250 is the index of the next biggest 250 companies in terms of market cap after the FTSE 100.

If a member of the FTSE 250 increases its market cap sufficiently to surpass a current member of the FTSE 100 then it can knock out a current member.

However, to keep membership consistent the company coming from the FTSE 250 must break into the top 90 of the FTSE 100 to be added or a current member must fall to 111th to be replaced.

The Value of the FTSE

The index began in January 1984 at the base level of 1000 points. The highest value it has ever reached is 6950.6, which happened at the end of 1999. Like most indices, the recent credit crunch hit the value of the FTSE as it fell below 3500 in March 2009, but since then we have seen it recover to over 6500 hitting a 12 year high of 6,840.27 on 22nd May 2013.

Does this mean that the value of the FTSE has increased almost sevenfold since 1984? Yes, it does, but that doesn’t necessarily mean that the value of companies has increased sevenfold. Quite a bit of that increase is due to inflation over time. Also, like most national indices, the component companies have changed over the years so we are not looking at the same list of companies since 1984.

Historical performance of the FTSE

A one-day line chart graphing the performance of the FTSE from mid-2008 to September 2013.

Calculation of the FTSE

The FTSE is calculated similarly to the S&P500 where we add up all the market capitalizations and divide by the FTSE divisor. The index is also free-float weighted so it takes into account only the shares held in public hands and not restricted stock held by company insiders or any government holdings. Each company is allocated a free-float adjustment factor depending on the number of shares that are publicly traded.

The calculation of the FTSE is, therefore:

Things to Remember When Trading the FTSE

  • The FTSE 100 futures contract is tradable from 7:01 – 19:59 (GMT), Monday to Friday.
  • The FTSE moves in increments of 0.50.
  • The margin requirement for trading the FTSE is usually about 2% (i.e. 50:1 leverage) with most brokers.
  • The minimum trade size is 1 index.
  • The currency of the FTSE is the British Pound.

 

Trade Example

So let’s say we want to BUY 1 index of the FTSE and it is currently priced at 6,500 and we have a Pound Sterling denominated trading account:
The margin (or funds) we need to put up to open this position would be £ 130.00.
(£ 6,500 (price of FTSE) X 2% (margin requirement) = £ 130)

This amount can be seen in the ‘used margin’ section on our trading platform.

If we have an account in a different base currency such as Euro, our margin remains 2% but our trading platform will automatically convert the £ 130 to Euro.

So say the EUR/GBP rate is 0.8400. We then see approximately €155 in the ‘used margin’ section on our US dollar account.
Every move in the FTSE is 0.50 pence so if the FTSE moves to 6,505.50 we have made a profit of £5.50 (or €6.55 at our above exchange rate).