What is the FTSE 100, or "footsie", and why should you care?
When I first started working at an investment firm in August 2017, as a fresh-faced 19 year-old straight out of Sixth Form, I didn’t really have a clue what a financial index was, let alone that “footsie” referred to anything other than a surreptitiously seductive interaction of the pedal extremities. As it turns out, in my role on the Instrument and Index Data Services team, I learnt that the footsie is far more relevant and useful to society than some fanciful foot flirting.
So, what is the footsie 100?
The footsie’s official name is the Financial Times Stock Exchange (FTSE) 100 Index. It is essentially a list of the 100 largest companies listed on the London Stock Exchange.
How are the index companies measured?
Size is measured by market capitalisation (or “market cap” as the industry prefers to call it), which is a fancy term for what is really just a company’s market value.
For those who want the details, this is found by multiplying a company’s current share price by the number of shares in issue or “issued shares” (the number sold to and held by investors), before multiplying this number by the company’s “free-float factor” (the free-float factor indicates the number of shares that are available to be traded on the market). This results in a value that indicates how much the company is worth according to the market.
The top 100, including some multinationals as well as British companies, are then included in the FTSE 100 and are known as “blue chip” companies (as in the poker world, where a blue chip represents the highest value). Blue chips are mature companies.
So what does it mean when the FTSE 100 rises or falls?
You’ll read or hear about how “the FTSE 100 opened 20 points higher at 7,301” or “the FTSE 100 fell 1.5% on the day”. Such comments are often followed by mention of a specific share or industry that caused the gain or loss.
As a company’s share price changes, so will its market cap, meaning the overall index will change in value, fluctuating up and down as the share prices of its constituent companies do. How much it moves depends on the company’s weight in the index.
By calculating the index using market caps, the index is “market weighted”, meaning that the companies in the FTSE 100 are weighted according to their size. So changes in Rio Tinto’s share price (one of the biggest companies in the FTSE 100) will have a greater effect on the overall index than a company like Tesco, whose market cap (and therefore weight in the index) is much smaller.
So if there’s really good news about a certain heavyweight company or industry (maybe the iron ore price increases and so mining companies, including Rio Tinto, see their share prices rise), this will have an effect on the overall index. Most likely this type of news will move the index higher as long as there isn’t terrible news from another company or industry to counteract this gain.
To clarify why the FTSE’s rise or fall is sometimes quoted in points, the index was originally launched in 1984 and given an arbitrary starting value of 1,000 points. Today it’s worth just less than 7,500 points which means that the top 100 companies have grown nearly 7.5 times in the last 35 years (give or take).
What does all this have to do with me?
Well, if you’re invested in a fund, your manager might be using something like the FTSE as a benchmark. In a passive fund, the manager purchases the constituents listed in the index and aims to match the performance of that index for you. In an active fund, the manager uses the index as a guide for what to purchase and aims to surpass the performance of that index. So you can assess the performance of your fund compared with what you would have achieved if you’d just invested in the index.
What’s more, as a UK pension fund holder, some of your pension investments will also likely be invested in UK shares that are listed on the FTSE indices. So the performance of the index will have an impact on your investments, as it will if you’re invested in a stocks and shares Isa.
The FTSE 100 is also considered a good indicator of the health of the UK and international economy (because it comprises both domestic and international companies). It often moves in response to political or economic events around the world as people become more or less confident (and therefore want to invest or disinvest) based on such news. It can give you a good idea of how investors are generally feeling, whether optimistic or nervous, which can in turn inform your own decision as to whether or not to invest, and what to put your money into or take it out of.
So while the FTSE 100 may not make your heart race as fast as some amorous attention from across the table, understanding its purpose will help you navigate the financial markets that much better (well more than some discreet dalliance probably will anyway).
What are some of the other indices out there?
While the FTSE 100 is a particularly popular index, especially in the UK, there are a number of other important indices. For example, there’s also the FTSE 250 (the 250 next biggest companies, often more domestically-oriented than those on the FTSE 100) and the FTSE 350 (which is an aggregation of the FTSE 100 and FTSE 250). Other companies run their own indices too, such as Standard & Poor’s, which manages the S&P 500 Index (the biggest 500 companies listed on the New York Stock Exchange).
Indices aren’t just lists of companies, however. Fixed income instruments (bonds, for example) have their own indices; the Bloomberg Barclays Global Aggregate index is an example. This consists of a large number of fixed income securities including government and corporate bonds, from both developed and emerging markets around the world. Meanwhile, the Bloomberg Commodity Index consists of a list of commodities including oil, corn, gold and copper.