FTSE 100 Index: What It Is and How It Shapes UK Markets

—

by

David Lee
in

Have you ever heard someone mention the FTSE 100 Index and wondered what it meant? You’re not alone. In the world of economics and investing, this term pops up often. The FTSE 100 Index is more than just a list of numbers scrolling across your TV screen; it’s a vital heartbeat of the UK economy. If you’re dabbling in trading strategies or simply trying to grasp how your investments work, understanding this index is a great place to start.

The FTSE 100 Index represents the largest companies listed on the London Stock Exchange, acting like a mirror reflecting the health and performance of the corporate UK landscape. From pension funds to stock portfolios, this index is used across the financial world to measure progress, growth, and even economic stability.

What is FTSE 100 Index

The FTSE 100 Index, often referred to as the “Footsie,” stands for the Financial Times Stock Exchange 100 Share Index. It’s a benchmark for the top 100 companies listed on the London Stock Exchange based on market capitalization. In simpler terms, it’s a snapshot of the biggest players in the UK economy.

These companies are called “blue-chip stocks”—mature, stable, and often with a long track record of success. While people sometimes use variations like “FTSE Index” or the trading symbol “indexftse:ukx,” they all essentially refer to the same financial gauge.

When investors and analysts look at the FTSE 100 Index, they get an idea of how the UK stock market is doing. It’s a go-to metric for anyone tracking economic trends or planning investment strategies in the region.

Breaking Down FTSE 100 Index

Let’s break it down even further. Think of the FTSE 100 Index as a financial leaderboard. It’s made up of the top 100 companies by market cap—meaning the total value of all their shares. Some household names like BP, Unilever, and GlaxoSmithKline often feature prominently. Since these firms operate globally, their performance affects not just the UK market but economies around the world.

This index uses a weighted system, which means bigger companies have more influence. For instance, if a heavyweight like Shell has a fantastic quarter, it could push the entire index upward—even if some of the smaller companies aren’t doing well.

Each quarter, the list is reviewed. Companies that no longer make the cut are replaced. This ensures the index always reflects the current market landscape. That’s part of what keeps the FTSE 100 relevant.

An interesting point is that the companies in the index span multiple sectors. You’ll find everything from energy and pharmaceuticals to banking and consumer goods. That diversity offers a solid reflection of the UK’s corporate world.

Let’s say you’re following the FTSE 100 because you’re interested in investing in an ETF (exchange-traded fund) that tracks it. The way it’s structured—heavily weighted, diverse sectors, and regular reviews—gives you a decent idea of market trends without needing to deep-dive into individual stocks. It’s like getting a weather report instead of measuring the rain in every town.

History of FTSE 100 Index

The FTSE 100 Index was born on January 3, 1984, with a base level of 1,000 points. It emerged from a collaboration between the Financial Times and the London Stock Exchange. Since its launch, the index has become the face of the UK stock market.

YearMilestone
1984Launched with a base value of 1,000
1999Reached record highs during the dot-com boom
2008Dropped significantly amid the financial crisis
2020Plummeted during the early stages of COVID-19
2023Recovered and adapted to new global economic pressures

Throughout the years, the FTSE 100 has not only tracked economic highs and lows but has also mirrored key global events. Whether it’s political unrest or a global health crisis, the index tells a story far beyond numbers.

Types of FTSE 100 Index

FTSE 100 Total Return Index

This version includes dividend payouts in its calculations. It offers a better picture of the actual returns investors get.

FTSE 100 Net Return Index

This takes into account the effects of taxes on dividends, making it helpful for investors focused on net gains.

FTSE 100 ESG Index

This environmentally and socially responsible version includes only companies that meet specific ESG standards.

TypeDescription
Total ReturnAccounts for capital gains and dividends
Net ReturnAdjusted for taxes on dividends
ESG VariantFocuses on companies meeting sustainability goals

How does FTSE 100 Index work?

The FTSE 100 Index works on a market capitalization-weighted basis. That means companies with higher market caps—like HSBC or AstraZeneca—carry more weight and influence over the index’s movements.

It gets updated in real-time during trading hours. Analysts and investors closely watch the performance, and every three months, the index undergoes a review. During this process, underperforming companies may be swapped out for rising stars.

Investors can’t buy the index itself, but they can invest in funds or ETFs that mirror its performance. This makes it a popular and relatively low-risk way to get exposure to a wide range of big companies.

Pros & Cons

Here’s a quick look at the benefits and drawbacks of using the FTSE 100 Index.

ProsCons
Represents UK’s economic strengthHeavily skewed toward large-cap companies
Easy way to invest in top firmsDoesn’t include small or mid-sized businesses
Strong global reachHigh exposure to specific sectors like energy
Widely tracked and reportedMarket-cap weighting can create imbalance

The FTSE 100 gives a reliable barometer of corporate UK but isn’t a complete picture of the economy.

Uses of FTSE 100 Index

Investment Benchmark

The FTSE 100 is often the yardstick against which fund managers measure their performance. It sets the standard for UK equity investments.

Market Sentiment Indicator

When the index rises, it usually signals investor confidence. A sharp fall, however, often points to growing uncertainty or economic downturns.

Portfolio Diversification

ETFs tracking the FTSE 100 allow investors to hold stakes in a wide range of sectors, spreading out risk.

FTSE Futures and Derivatives

Traders use futures contracts based on the FTSE 100 to speculate on or hedge against price movements. These instruments are particularly helpful during market volatility.

Policy and Economic Analysis

Policymakers and economists observe FTSE 100 trends to shape financial regulations or economic decisions. It’s a key reference point for forecasting.

The FTSE 100 Index touches everything from day trading to retirement planning. It’s a practical tool and a mirror reflecting economic confidence, investor sentiment, and corporate performance.

Resources

David Lee

David Lee serves as an economist at Tech24. He earned a bachelor’s degree in economics from the University of Chicago and a master’s degree in finance from the MIT Sloan School of Business. His career includes: From 2008 to 2013, he worked as an economic reporter for the Wall Street Journal, where he wrote various economic and financial articles. Since then, from 2013 to 2017, he worked as an economic analyst at Bloomberg, where he analyzed global economic trends and wrote reports. From 2017 to now, he has provided in-depth analysis and insights in technology economics as an economic analyst at Tech24. David Lee’s specialty is global economic trends, financial market analysis, the convergence of technology and economy, and start-up and venture capital. He won the “Best Economic Reporter of 2019” award from the International Economic Journalists Association and received great acclaim for his economic analysis report titled “The Impact of Technology on the Economy.” In addition, he contributed to the expansion of his readership with the series Global Economic Outlook conducted by Bloomberg. His vision is to provide readers with in-depth insights into the convergence of the global economy and technology through Tech24, and to help them make better economic decisions. Emphasizing the positive impact of technology on the economy, he wants to explore strategies for sustainable economic growth.