The FTSE100 sometimes referred to as the “Footsie,” stands as one of the most widely recognized and referenced indices in the world of finance. Providing a snapshot of the United Kingdom’s economic health, the FTSE100 signifies much more than just a number. This article explores what the FTSE100 is, the qualification criteria for its constituents, its rebalancing mechanism, the computation of its value, and its importance to investors.
What is the FTSE100?
Established in 1984, the FTSE100, or Financial Times Stock Exchange 100 Index, is a market-capitalization weighted index comprising the top 100 companies listed on the London Stock Exchange (LSE) in terms of market capitalization. It serves as a barometer of the UK’s economic health and a gauge of the UK’s leading companies overall performance.
Criteria for Inclusion
A company’s inclusion in the FTSE100 is based primarily on its market capitalization, with the highest-valued firms securing a spot in the index. However, certain additional criteria must also be met. For instance, companies must be incorporated in the UK or conduct a significant proportion of their business operations there. Additionally, the company’s shares must be denominated in pounds sterling or euros and have a Sterling or Euro traded option available on the LSE’s SETS.
Rebalancing the FTSE100
The FTSE100 is not a static entity. It undergoes a process known as rebalancing or reconstitution quarterly, typically in March, June, September, and December. During this process, FTSE Russell, the index provider, reviews and adjusts the constituents of the FTSE100 based on their latest market capitalization data.
If a company outside the top 100 rises to 90th position or higher, it automatically earns a place in the FTSE100. Conversely, any company that falls to 111th position or lower is automatically relegated from the index. Companies ranking between 91 and 110, and those between 101 and 110, may be subject to promotion or demotion, respectively, depending on other companies’ movements.
Calculating the FTSE100 Index Value
The value of the FTSE100 index is calculated using the market capitalizations of its constituent companies. Each company is assigned a weightage proportionate to its market capitalization. The index level is determined by adding the market value of all companies and multiplying the total by the index divisor. The divisor is a proprietary figure adjusted periodically to account for changes like corporate actions or a change in the number of outstanding shares.
Importance of the FTSE100 for Investors
The FTSE100 holds significant importance for investors, both domestically and internationally. For UK-based investors, it offers a benchmark for the country’s largest and most influential companies. It helps investors gain an insight into the market’s overall direction, identify potential investment opportunities, and compare individual investment performance against a broad market indicator.
International investors often use the FTSE100 as a proxy for the UK market as a whole. As many of the companies in the FTSE100 are multinational giants, the index also reflects global economic trends to an extent.
Understanding the FTSE100 can also aid in diversification. By comparing the performance of individual investments with the index, investors can balance their portfolios effectively.
The FTSE100 is more than a market index. It is a window into the UK’s economic landscape, a reflection of global market trends, and an indispensable tool for informed investment decisions. Its dynamic nature keeps it relevant, making it an integral part of financial analyses and investment strategies worldwide. Whether one is a seasoned financial analyst, a savvy investor, or a finance enthusiast, understanding the FTSE100 and its mechanics can go a long way in one’s financial journey.