The FTSE 100 Index
In the stock market, a particular investment may represent good or bad value: it’s up to the trader to judge the prospects of listed companies. Stock market indices are one important source of data for such judgements. Indices offer an easy to interpret one-number summary of the market’s performance at any point in time.
Because the UK stock market is comprised of different sectors, each of which performs differently, its performance is summarised by a range of indices. The best known of these is undoubtedly the FTSE (pronounced “Footsie”) 100 Index.
What is the FTSE 100 Index?
In a nutshell, it’s an indicator of the performance of shares issued by the top 100 companies trading on the main market of the London Stock Exchange. Companies featured in the Financial Times Stock Exchange 100 Share Index (to use its full name) are selected by size. Unlike indices which are computed on stock price alone, the FTSE 100 is based on the stock price multiplied by the number of shares issued: the market capitalisation. The bigger the market capitalisation of any company, the greater the impact it has on the index.
When was the FTSE 100 Index Formed?
The FTSE 100 Index was first published on January 3rd 1984, with a base level of 1000. It superseded the FT30 which, having been devised in 1935, now has the honour of being the oldest surviving stock market index. But the FTSE 100 represents an improvement over the FT30: the latter uses the average of stock prices across a selection of companies, without taking into account the size of the issue.
How Can You Interpret the FTSE 100?
Interpreting the FTSE 100 is simple: you take the value of the index at any particular point in time and compare it to the value at a second point. If the index has risen, this indicates that more traders are buying than selling, and also means that share prices have gone up. But if the index has gone down, it means that the balance has shifted in favour of selling, and suggests that investors are losing money. Many tracker funds follow the performance of indices such as the FTSE 100.
Why does the FTSE 100 Matter?
If you’re an investor, the relevance of the FTSE 100 is clear. But its importance goes beyond its usefulness as a basis for trading, because the FTSE 100 Index is also thought to be a barometer of the UK’s economic health. The recent global financial crisis saw the FTSE 100 fall from over 6000 to 3500 in the space of a year. At the time of writing, the index stands at just under 7000, heralded as a reassuring sign of recovery.
The FTSE 100 Index provides us with an easy to use metric for assessing the performance of the top 100 companies trading on the London Stock Exchange’s main market. First published in 1984 with a base rate of 1000, the FTSE 100 is the successor to the less complex FT30, now the oldest surviving stock market index. Given as a simple, one-number summary, the FTSE 100 is both a source of useful intelligence for investors and an overall indicator of the UK’s economic health.