An introduction to the FTSE 100

The Financial Times Stock Exchange (FTSE) 100 is one of the most closely followed indices in the world. It is made up of the largest companies listed on the London stock exchange, including a number of big multinationals. It is seen by market watchers as an important indicator of not only the UK and European economies, but the global economy as well, and is a useful starting point for traders looking to understand European markets.

What stocks make up the FTSE 100?

The composition of the FTSE 100 has changed dramatically since its introduction in 1984. Most of the original companies listed have disappeared through mergers or takeovers or have fallen from grace while others have emerged to take their place. In fact, only 28 of the original 100 remain on the list.

Today, the FTSE 100 is primarily made up of multinational companies. Many of them are household names, including:

• BP (oil producer)

• Rio Tinto (mining)

• BHP Billiton (mining)

• Royal Dutch Shell (resources)

• GlaxoSmithKline (pharmaceuticals)

• Unilever (consumer goods)

• Coca Cola (consumer goods)

• Diageo (consumer goods)

• HSBC (financial services)

• Barclays (financial services)

• Lloyds (financial services)

As evidenced by the above, the index is dominated by financial services, resources stocks and consumer goods, though the healthcare, industrial and telecommunications sectors also make up a significant portion of the index in terms of weighting. One thing that distinguishes the FTSE 100 from its US counterparts like the NASDAQ and the S&P 500 is the almost total lack of tech stocks, which make up only a little more than 1% of the index.

Is the FTSE 100 a good barometer of the UK economy?

In a word, no. The index is dominated by global companies, many of whom have relatively limited exposure to the UK domestic economy. A more accurate representation of the UK economy would be the larger FTSE 250 index, which includes a greater number of domestically focused businesses.

However, the health of the British economy does have a significant indirect effect on the index thanks to currency fluctuations. Since most of the companies listed report their earnings in sterling, the index tends to rise and fall with the pound. Since they earn most of their money from international operations, a weaker GBP will inflate earnings while a stronger currency will have the opposite effect.

How have recent events affected the index?

Given the recent uncertainty around Brexit, it may come as a surprise that the split from the European Union has not troubled the FTSE 100 unduly. The pandemic, however, wiped more than 42% off the index’s value in the space of a month in early 2020. Although it had largely recovered by mid-2021, it had still not returned to the pre-pandemic highs of January 2020.

How to invest in or trade the FTSE 100

The FTSE 100 is one of the most popular trading instruments on our platform​. In the Asia-Pacific region it is especially attractive to traders looking for international exposure in a highly liquid and easy to follow market, as well as people looking to trade outside their usual business hours. Here’s how you can do it: 

Buying and selling FTSE 100 stocks

Investors can trade shares​ in any of the companies included in the FTSE 100 via our platform. By nature, these are all large companies that could be called “blue chip” stocks.

The good news for traders, especially those starting out, is that many companies are closely followed by analysts and the financial media, meaning up-to-date information about them is relatively easy to obtain.

By focusing on individual companies, rather than the entire index, a trader or investor is trying to focus on the stocks they believe offer the most compelling investment case.

Buying FTSE 100 ETFs

There are exchange-traded funds that track the FTSE 100, such as the iShares Core FTSE 100 UCITS ETF or the Vanguard FTSE 100 UCITS ETF. Investing in these instruments gives you an investment that tracks the performance of the whole index.

FTSE 100 Futures

FTSE 100 futures contracts or CFDs (contracts for difference) are another popular item for traders. With these investment instruments, traders effectively bet on where the index will be at a point in the future, and do not take ownership of the underlying assets they are trading. These trades are normally done on margin, meaning the trader puts a certain amount of money towards the trade and borrows the rest from the broker to increase their leverage. This can be done for both the index and many of its component companies.

Why the FTSE 100 should be on your watchlist

With a list of components that includes a large number of major international businesses in several sectors, the FTSE 100 is seen as an important barometer of the global economy – alongside the S&P 500, the Hang Seng Index and others. It also forms the basis of many investment instruments and serves as a benchmark for numerous funds, making it one of the many information sources traders and investors should keep an eye on.