The FTSE 100, as the most widely followed FTSE index, represents the share price performance of the largest 100 UK-listed companies by market capitalisation.
It is just one of many FTSE indices that constitute the shares of UK-listed firms. In all, there are thousands of other FTSE indices, many of which track the performance of shares quoted overseas.
What is FTSE index?
The FTSE brand name was previously jointly owned by the Financial Times newspaper and the London Stock Exchange. Today, it is wholly owned by the London Stock Exchange through its subsidiary, FTSE International Limited.
While the FTSE 100 was launched in 1984, it was long preceded by the inception of the FTSE All Share index in 1962, or the FT Actuaries All-Share as it was then called.
The FTSE All Share is still thought of as a strong performance measure for firms listed in London; it comprises well over 600 companies, which together represent 98% of the UK´s market capitalisation.
The launch of the FTSE 100 in 1984 was followed by the inception of the FTSE 250 in 1992. As its name suggests, this latter represents the share prices of the largest 250 UK-listed firms by market capitalisation. Among the other UK FTSE share indices are the FTSE 350 and the FTSE SmallCap.
FTSE 100: closely watched
While having far fewer members than the FTSE All Share, and representing around 80% of the UK´s market capitalisation, the FTSE 100 is much more closely watched.
As a general rule of thumb, the firms listed in the FTSE 100 index tend to be relatively global in nature, deriving a significant amount of their revenues from abroad.
Meanwhile, the performances of the FTSE 350 and FTSE SmallCap tend to be much more related to the underlying strength of the UK economy. This is because smaller UK-listed firms are generally more dependent on the UK for their revenues versus the blue-chip names in the FTSE 100.
The upshot is that the FTSE 100 tends to benefit from weakness in the pound.
Should sterling fall in value, many of the firms in the FTSE 100 will see their profits in sterling terms increase. They would receive more pounds when revenues denominated in foreign currencies are converted into sterling.
The FTSE 100 is calculated in real time, with the index level published each second that the London stock exchange is open – the trading day begins at 08:00 and ends at 16.30.
As with all the FTSE indices, share prices are weighted by market capitalisation. Using this methodology means that the larger companies make more of a difference to the index level than the smaller constituents.
Global by nature, the FTSE 100 tends to rise and fall along with worldwide equity markets in general.
Peaks and troughs
When the FTSE 100 was incepted in January 1984, its base level was 1000. By the end of 1999, during the final throes of the dot-com boom, the FTSE 100 had climbed to 6,930.20.
With the bear market that followed the earlier exuberance, by March 2003 the index had plunged to 3,491.59.
Prior to the beginning of the financial crisis in 2008, the FTSE 100 had still not recovered to its previous high of 1999. The index reached a peak of 6,732.40 in June 2007, but slumped to 3,530.73 in March 2009 as the ensuing financial crisis took its toll. This was just shy of the trough reached some six years earlier.
The index is currently hovering around all-time highs; since the financial crisis of 2008/2009, global equity prices have been pushed higher by low interest rates and quantitative easing measures. On 26 May 2017, the FTSE 100 reached an all-time closing high of 7,547.63.
In general, small and mid-cap stocks are viewed as being riskier than their large-cap counterparts.
Larger companies are often in a strong position from a trading perspective in their respective markets as well as tending to have more robust balance sheets. During the financial crisis, both the FTSE 250 and FTSE SmallCap fell further and faster than the FTSE 100.