FTSE 100

Definition

The FTSE 100, or Financial Times Stock Exchange 100 Index, is a share index that represents the 100 largest companies listed on the London Stock Exchange by market capitalization. It serves as a key indicator of the overall health of the UK stock market and economy, often used by investors and analysts to gauge market trends and investor sentiment.

5 Must Know Facts For Your Next Test

1. The FTSE 100 was launched in January 1984 and has become one of the most widely recognized stock indices globally, often viewed as a barometer for the UK economy.
2. Companies in the FTSE 100 are required to meet certain criteria regarding market capitalization, liquidity, and governance standards to be included in the index.
3. The index is calculated in real-time during trading hours, reflecting changes in stock prices of its constituent companies and providing an up-to-date snapshot of market performance.
4. Major sectors represented in the FTSE 100 include finance, energy, consumer goods, and pharmaceuticals, making it diverse but also reflective of the UK's economic landscape.
5. Changes to the FTSE 100 can occur when companies are promoted or demoted based on their market capitalization relative to other constituents, which happens quarterly during 'index rebalancing.'

Review Questions

• How does the composition of the FTSE 100 reflect trends in the UK economy?
  • The composition of the FTSE 100 showcases major sectors that drive the UK economy, such as finance and energy. By analyzing which companies are included in the index, one can gauge economic trends, like shifts in consumer spending or investment patterns. For example, if technology companies gain prominence within the index, it could indicate a growing tech sector contributing to economic growth.
• Evaluate the significance of using the FTSE 100 as an investment benchmark for portfolio managers.
  • The FTSE 100 serves as an essential benchmark for portfolio managers because it encompasses a broad range of large-cap companies representing various sectors. This allows managers to compare their fund's performance against a standard that reflects overall market movements. Additionally, many investors use FTSE 100 index funds to achieve diversification while keeping costs low, further reinforcing its role as a fundamental tool for evaluating investment strategies.
• Assess how changes in global economic conditions can impact the performance of the FTSE 100 and investor behavior.
  • Global economic conditions significantly influence the performance of the FTSE 100, as many companies within it operate internationally. For instance, a downturn in global markets can lead to decreased revenues for multinational firms listed in the index, causing their stock prices to fall and dragging down overall index performance. Investor behavior may also shift in response; during times of uncertainty, investors might seek safer assets or diversify their portfolios away from equities altogether, impacting liquidity and trading volumes within the FTSE 100.

Related terms

Market Capitalization: The total market value of a company's outstanding shares, calculated by multiplying the share price by the total number of shares outstanding.

Stock Exchange: A regulated marketplace where securities such as stocks and bonds are bought and sold, providing a platform for companies to raise capital and for investors to trade shares.

Index Fund: A type of mutual fund or exchange-traded fund that aims to replicate the performance of a specific index, such as the FTSE 100, by holding the same stocks in the same proportions.