FTSE 100: Discover How to Invest in the Biggest UK Stocks

The Financial Times Stock Exchange (FTSE) 100 is an index of the London Stock Exchange, a major financial market in the United Kingdom. It is one of the largest and oldest financial markets globally, and the FTSE 100 serves as a crucial stock market indicator.

Now, let’s explore what the FTSE 100 is, how it’s structured, and some essential information for investing in this index.

FTSE

What is the FTSE 100 Index?

The FTSE 100 is the primary benchmark index of the London Stock Exchange. Its name is derived from the initials of “Financial Times Stock Exchange,” and the number 100 signifies that it comprises the top 100 companies listed on this stock exchange.

This index is overseen by the Financial Times magazine, which publishes it in collaboration with a London Stock Exchange Group subsidiary company.

The FTSE 100 isn’t just a measure of the overall market and an economic reference point. Because of its characteristics, including volatility, liquidity, and significance, it’s an appealing asset for investment.

History of the FTSE 100

Let’s delve into its history through these six key points:

  1. 1984: The FTSE 100 was first calculated, starting with a base level of 1,000 points.
  2. 1999: It reached an all-time high of 6,950.6 points on December 30. However, the dot-com bubble burst led to a significant decline in the following years.
  3. 2007: It reached a high again, hitting 6,091.33 points on February 8, but the 2008 financial crisis caused it to plummet to 3,500 points.
  4. 2015: The index achieved a new historic high, surpassing the 7,000-point mark.
  5. 2020: The COVID-19 pandemic led to a roughly 30% drop, with the index temporarily falling below 5,000 points.
  6. 2021: Since the end of that year, the FTSE 100 has been trading at elevated levels, where it remains today.

What are the main companies of the FTSE 100 index?

Below is a table of the ten largest companies by market capitalisation:

PositionCompanyTicker
1ShellSHEL
2AstraZenecaAZN
3HSBCHSBC
4UnileverULVR.L
5BPBP
6DiageoDEO
9British American TobaccoBTI
10GlencoreGLEN

How to Invest in the FTSE 100?

Now that we understand what the FTSE 100 is let’s explore how to invest in it.

Investing via Shares

The easiest way to invest is in individual company shares or stocks within the FTSE 100 index. You don’t need to invest in all of them; investing in one or several major companies will suffice, as large companies significantly impact the index’s movement.

So follow the next steps:

  • Open an account with a broker (such as one of the best brokers for beginners or the best commission-free brokers)
  • Deposit your funds.
  • Search for the stock (or stocks) you want to buy
  • Fill in the order details, such as amount and stock order type.
  • Send the order.

It’s crucial to monitor your investments regularly to make informed decisions.

Another way to invest in an index like the FTSE 100 is by replicating it. This involves purchasing all or a substantial portion of the index’s constituent stocks in the same proportion as their weighting in the index. However, this can be impossible for a small retail investor, which is why funds are extremely popular nowadays.

Investing via ETFs

Exchange Traded Funds (ETFs) offer a convenient investment method in the FTSE 100. You can find ETFs designed to closely track the performance of this index, providing a passive investment option.

Here are some FTSE 100 ETF options:

iShares Core FTSE 100 UCITS ETF (Dist)

  • Ticker: IUSZ
  • ISIN: IE0005042456

HSBC FTSE 100 UCITS ETF GBP

  • Ticker: H4ZB
  • ISIN: IE00B42TW061

Vanguard FTSE 100 UCITS ETF Distributing

  • Ticker: VUKE
  • ISIN: IE00B810Q511

It is important to remember that when investing in an ETF, you are acquiring a share in a diversified fund that replicates the FTSE 100 index. This allows you to gain broad exposure to the companies that comprise the index and diversify your risk.

Investing in FTSE 100: Mutual Funds

You can consider investment funds that mimic the FTSE 100 index for a more diversified approach without buying individual stocks. Here’s how:

  1. Research various funds, considering factors like fees, historical performance, and the reputation of fund managers.
  2. Select a fund that closely follows the index’s performance. Well-known managers like iShares, Xtrackers, Invesco, or Vanguard offer such funds.
  3. Invest in the chosen fund through a brokerage account or with the guidance of a financial advisor.

To ensure that your choice aligns with your investment goals and risk tolerance, learn more about these funds in our index fund guide.

Investing via Futures and Options

Derivative products like futures and options are another way to invest in the FTSE 100. These financial instruments are leveraged and derive their value from the FTSE 100’s price movements. However, they require experience in handling such products and careful capital and risk management.

If you’re new to derivatives, explore options and futures trading. Alternatively, if you’ve chosen a strategy with options and futures, consider the best brokers for options or futures instead.

Both futures and options also allow for short selling, which means you can profit from market declines without actually owning the underlying assets.

These derivatives can be useful for hedging and short-term trading but require a deep understanding of their complexities.

In summary, investing in the FTSE 100 can be done through individual shares, ETFs, index investment funds, or derivatives like futures and options. Each option has its own benefits and risks, so aligning your investment strategy with your financial goals and risk tolerance is essential.

How Does the FTSE 100 Work?

The FTSE 100 index undergoes quarterly reviews, which occur on the first Friday of each month and close each quarter (March, June, September, and December). During these reviews, decisions are made regarding whether companies should be added to or removed from the index, and their weight within the index is adjusted based on their market capitalisation.

How is the FTSE 100 Index Calculated?

A stock index like the FTSE 100 is essentially a weighted average of the market capitalisation of its constituent companies. Its primary role is to gauge the overall performance of the represented market.

FTSE 100

Here’s how the FTSE 100 is calculated:

  1. Total index value: The number of shares in circulation for each company is multiplied by the price of each share.
  2. Assigned weight: The weight of each company is determined based on its market capitalisation relative to the total index, establishing its weighting within the index.

The FTSE 100 index undergoes periodic reviews to remain current and reflect market changes. These reviews involve adding new companies, removing those that no longer meet inclusion criteria, and adjusting the weights of existing companies.

In summary, the companies in the FTSE 100 account for approximately 70% of the total market value on the London Stock Exchange. This makes the index a reliable representation of the overall performance of this key UK market. Since the London Stock Exchange is a pivotal financial market in the UK, the FTSE 100 is a vital economic indicator for the country.

What Sectors Does the FTSE100 Comprise?

In terms of sectoral composition, if we refer to an ETF that tracks the FTSE 100, such as the Vanguard FTSE 100, we can observe the following sector breakdown:

  • Consumer goods: 18.15%
  • Financial services: 17.67%
  • Healthcare: 13.08%
  • Energy: 12.86%
  • Industrial goods: 11.24

Data source: Morningstar

This composition highlights the significance of consumer goods and financial services within the index, which is not surprising given London’s status as a major global financial centre.

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FAQs

What is the significance of the FTSE 100 index for the UK economy?

The FTSE 100 index plays a pivotal role as an economic barometer for the United Kingdom. Comprising 100 of the largest companies listed on the London Stock Exchange, it reflects the performance of key sectors like finance, energy, and healthcare. Investors, policymakers, and analysts closely monitor movements in the FTSE 100 as an indicator of the UK’s economic health and the strength of its stock market.

Can investors directly buy shares in the FTSE 100 index?

No, investors cannot buy shares in the FTSE 100 index itself. Instead, they can invest in individual companies that make up the index or use financial instruments such as ETFs and index funds that closely mimic the index’s performance.

Are there alternatives to investing in the FTSE 100 for exposure to the UK stock market?

Yes, there are alternatives for investors seeking exposure to the UK stock market. Aside from the FTSE 100, the London Stock Exchange offers access to other indices, such as the FTSE 250 (representing medium-sized companies) and the AIM (for smaller companies). Investors can also explore individual stocks listed on the exchange or consider sector-specific ETFs and funds tailored to their investment goals and risk tolerance.

What does FTSE stand for?

Financial Times Stock Exchange (FTSE), now known as FTSE Russell Group which is a company specialized in providing index offerings for the global financial markets

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