The FTSE Index stands for Financial Times Stock Exchange 100 Index. This is the primary blue chip stock index of the London Stock Exchange, often referred to as the ‘Footsie’ Index. The number of stocks in the index is capped at 100.
How does the FTSE 100 work?
The index is a very popular stock market index in the UK. Formed in 1984, the index is currently maintained by the FTSE Group. The index is calculated throughout a trading session regularly.
The FTSE 100 Index is capitalisation weighted, meaning that larger stocks have a larger impact on the index movements. Below is a snapshot of the 10 largest stocks in the FTSE 100 Index.
The largest stock in the LSE right now is the pharma giant AstraZeneca, with a market cap of £173.4 billion. This is followed by the oil producer Shell at £173.2 billion. The banking behemoth HSBC is valued at £125 billion.
FTSE 100 Companies (top 10)
|Code||Name||Market Cap (m)|
|AZN||ASTRAZENECA PLC ORD SHS $0.25||173,495.51|
|SHEL||SHELL PLC ORD EUR0.07||173,251.40|
|HSBA||HSBC HLDGS PLC ORD $0.50 (UK REG)||125,012.85|
|ULVR||UNILEVER PLC ORD 3 1/9P||102,574.04|
|BP.||BP PLC $0.25||90,393.11|
|DGE||DIAGEO PLC ORD 28 101/108P||69,717.52|
|RIO||RIO TINTO PLC ORD 10P||63,618.36|
|GSK||GSK PLC ORD 31 1/4P||62,891.26|
|BATS||BRITISH AMERICAN TOBACCO PLC ORD 25P||58,637.89|
|GLEN||GLENCORE PLC ORD USD0.01||55,932.39|
Source: London Stock Exchange (see this FTSE Link for a calculation)
Can you trade the FTSE 100 Index?
Yes, you can. There are multiple financial products derived from the underlying FTSE 100 Index that you can trade with, including:
- Index Futures (formerly LIFFE, now at ICE) – through futures broker
- Options (ICE) – through an options trading platform
- Exchange-Traded Funds – with an ETF investing account
- Investment Funds – with a fund platform
- Spread betting – with a CFD trading platform or a spread betting broker
Related guide: Best brokers for trading indices
The easiest way to buy the FTSE 100 is to buy an ETF. ETFs are gaining popularity because of the ease of trading, unlike futures or options where there are rollover costs and expiry dates. Whereas index futures, usually expire on March, June, September, and December, meaning you incur costs to extend the position quarterly.
What is the attraction of FTSE 100 Index?
FTSE stock Indices (100 and FTSE 250) are closely watched. The index is attractive to investors and traders alike because:
- FTSE 100 stocks are highly international and these companies derived their earnings globally
- FTSE 100 offers good liquidity – as some of the FTSE stocks are huge (e.g. HSBC, BP, and GSK)
- FTSE 100 pays relatively good dividend yields compared to the UK bond yields
The City of London is a globalised arena and many companies choose to list there. Investors can get a good spread of stocks from across the world.
What drives the FTSE 100?
Stock markets are often driven by a wide variety of factors.
For the UK market, the number one factor is obviously Brexit. However, bear in mind that many FTSE 100 stocks are globalised. Brexit is one only factor impacting their businesses. The primary and instant impact that Brexit can hit FTSE 100 stocks is through the Sterling exchange rate.
Other important factors include:
- Macro factors (e.g. GDP, unemployment, business indicators etc)
- Monetary factors (e.g., Quantitative Easing, rates movements, yield curve etc)
- Technical factors (e.g., new highs or lows)
- Earnings factors (e.g., profitability and earnings momentum)
Another important factor to watch for is commodity prices. Why? Because the FTSE 100 Index has large mining and energy sectors. BP, Royal Dutch Shell, BHP, Rio Tinto, Anglo American, and Glencore are some of the largest energy and mining groups in the world. And they are all in the FTSE 100 index.
Seven-Point Guide on Trading the FTSE 100
To trade the FTSE 100 profitably requires a good trading strategy. The following tips may help you to maximise your chances of trading the FTSE 100 successfully over the long term.
- Understand your requirements for trading the FTSE 100. Are you an intra-day or positional trader? Do you invest for the long term? Are dividends important?
- Research various technical (or fundamental) indicators to support the trading objective. There are many technical indicators that you can use, including
- Trend indicators like moving average
- Support & resistance levels (Guide to Support/Resistance)
- Patterns like breakout and reversals
- Backtest these indicators if they are profitable over time. Select a few that you can understand. Check their pitfalls and signal variations over time. Put these indicators into a trading software and backtest. Can you withstand the drawdown?
- Select the indicators that best suit the objective. Once the initial backtest research is completed, setup a mock testing period of, say, six weeks. Assess the results. Are they good? Which type of indicators works better?
- Include risk management factors in your assessment. Important factors like position sizing, leverage levels, stop loss levels and risk-reward ratios must be specified. Trading without risk management is like driving without brakes and safety belts.
- Select trading platforms that support your operations. Capital requirements, platform fees, and trading capability are all important factors to look for. See the comparison table above.
- Commit capital and go live. Make sure that you drip feed capital into new strategies because there may be many things to iron out before you’re comfortable with it.