Futures are among the most commonly used financial instruments in the world. Retail and institutional investors use futures contracts for hedging and speculating on the future performance of assets, including equities, commodities and fixed income.
These contracts allow traders to use leverage in a bid to maximise profits, although this can increase the risk of oversized losses.
The Financial Times Stock Exchange (FTSE) 100 Index, also known as the UK100, is one of the most widely quoted benchmark indices in the world. It gives investors exposure to some of the biggest companies listed on the London Stock Exchange (LSE).
In this article, we explore what a futures contract is, and look at FTSE 100 Index and FTSE 100 Index futures.
What is the FTSE 100 Index?
Occasionally referred to as the ‘Footsie’, the FTSE 100 Index is a blue-chip index that tracks the performance of the 100 largest companies listed on the LSE. Alongside the FTSE All-Share index and the FTSE 250 Index, the Footsie is one of the leading benchmark indices in the UK, widely regarded as the best performance indicator of large-cap UK companies.
The FTSE 100 Index is market cap-weighted index, which means price movements of an index component with higher market capitalisation will have a larger effect on the index than a smaller market cap company.
Constituents of the FTSE 100 are ranked by their full market capitalisation. Any company that falls below the 110th position is automatically deleted from the FTSE 100. Once a company leaves the index, the highest ranking company on the FTSE 250 will enter the FTSE 100 Index.
As of 31 May 2022, oil and gas giant Shell (RDS) was the biggest constituent of the FTSE 100, with an index weight of 9.1%. Pharmaceutical firm AstraZeneca (AZN), multinational bank HSBC Holdings (HSBC), Dove shampoo and Hellmann mayonnaise seller Unilever (ULVR), and healthcare company GlaxoSmithKline (GSK) made up the remaining top five constituents.
Energy, healthcare and financial services sectors were the highest weighted sectors, representing over 30% of index weightage.
The FTSE UK indices are managed by FTSE Russell, a wholly-owned unit of London Stock Exchange Group (LSEG).
What is your sentiment on UK100?
FTSE 100 futures overview: What is futures contract?
Futures are derivative financial contracts that represent an agreement to buy or sell a specific quantity of an asset at a predetermined price and date.
Unlike options contracts, where the buyer or seller has the right to buy or sell a certain asset at a specified price in the future, parties of a futures contract are obligated to buy or sell the asset. Both these financial products are used by investors for hedging and for speculating future price movements.
According to the LSEG, FTSE 100 Index futures and options are the most commonly used instruments for banks, brokers, specialist traders and market makers to manage risk on the UK equity market.
How do FTSE futures work? A FTSE 100 futures contract is priced at £10 ($12.01) per index point and has a tick size of $0.5. FTSE 100 futures are cash-settled upon expiration, meaning no physical asset is exchanged.
FTSE 100 Index futures order book trading hours start at 8:00 and end at 16:40 (GMT). FTSE 100 futures attract an order-book fee of £0.20 per contract, a clearing fee of £0.02 and an expiration fee of £0.17, according to the FTSE 100 Index Futures & Options factsheet.
It is important to note that futures contracts are leveraged financial instruments that can maximise a trader’s profits or losses. Moreover, if the market begins to trade against the position of a trader’s futures contract, the trader may receive margin calls requiring additional funds to be deposited to their account to cover potential losses.
What drives the value of FTSE futures?
The value of a futures contract is based on the value of its underlying asset. In the case of FTSE 100 futures, the performance of the FTSE 100 will determine the gains and losses from future contract trades.
Stock prices in equity markets are dependent on supply and demand. Usually, the factors that affect stock market performance can be categorised into three groups: fundamental factors, macroeconomic factors and market sentiment.
Fundamental factors mainly refer to the financial health of a company or the viability of its revenue-earning and profit-generating capacity. Financial metrics like earnings per share (EPS) and price-to-earnings (P/E) ratio are among the widely used indicators of determining whether a stock is worth investing in. In the case of the FTSE 100, it is important to remember that the index is a market-cap weighted index so its biggest constituents will have significant influence over its performance.
Macroeconomic factors refer to the external factors like competition, global economic growth, inflation, supply chain dynamics, demographics and geo-political conditions that alter the supply and demand for a company’s stock.
Market sentiment refers to the psychology of investors, both individually and collectively. Fear and greed greatly influence the movements of stock prices. Market cycles are known to go through peaks and troughs of optimism, euphoria, anxiety, panic, capitulation and depression.
Behavioural economics has gained prominence in the 21st century as a means of studying decision-making processes of investors.
Where are FTSE 100 index futures traded?
FTSE 100 Index futures are traded on the LSE and the Intercontinental Exchange (ICE).
According to the ICE, FTSE 100 futures trading hours outside the UK are between 8:00 to 16:00 in New York and Singapore. In essence, FTSE 100 Index futures are open for trade throughout the day across the world on open trading days.
It is important to note that this article does not constitute financial or investment advice. Before you choose to invest in FTSE 100 futures, always do your own research and remember that your decision should be based on your attitude to risk, your expertise in this market, the spread of your portfolio and how comfortable you feel about losing money.
There are no guarantees. Markets are volatile. You should conduct your own analysis on FTSE futures price, and take into account your existing portfolio and risk tolerance. And never invest money that you cannot afford to lose.
Is FTSE 100 a good investment?
The FTSE 100 Index is a blue-chip index that tracks the performance of the 100 largest companies listed on the London Stock Exchange. It is often regarded as the performance indicator of large-cap UK equities.
Whether it is a good investment for you or not will depend on your portfolio composition, investment goals and risk profile, among other factors. Different trading strategies will suit different investment goals with short or long-term focus. It is important to always conduct your own due diligence before trading. And never trade money you cannot afford to lose.
Will FTSE 100 go up or down?
The outlook for the FTSE 100 will likely be dependent on the earnings performance of its constituent companies, macroeconomic conditions and prevalent investor sentiment, among other factors. It is important to remember that the FTSE 100 Index is a market-cap weighted index which means its biggest constituents will have significant influence over its performance.
Make sure you always conduct your own due diligence before trading. And never trade money you cannot afford to lose.
Should I invest in FTSE 100 Index futures?
Only you can decide whether an investment in FTSE 100 futures is right for you. Always conduct your own due diligence before trading. And never trade money you cannot afford to lose.