FTSE 100

Trading Basics

FTSE 100

Brief Summary: The FTSE 100 is an index of the top 100 performing blue-chip stocks on the London Stock Exchange< as ranked by their market capitalisation.

Full Overview: The FTSE 100 is a major stock index that tracks some of the largest UK-based companies. Here, we’ll cover what companies make up the FTSE 100, how the Index is calculated and how investors and traders can get exposure to the FTSE 100.

What Does FTSE 100 Stand for?

The FTSE 100 stands for the Financial Times Stock Exchange 100 Index, which is a share index of the 100 largest companies listed on the London Stock Exchange. The FTSE 100 Index is also informally called the “Footsie”.

The origin of the FTSE 100 name comes from the times when the index was owned 50/50 by the Financial Times (FT) and the London Stock Exchange (LSE), and the number “100” refers to the number of companies included in the index.

Just like other major stock indices around the world, the FTSE 100 is often considered as a measure of prosperity and profitability or the largest companies in the United Kingdom. When the market capitalisation of companies listed in the index rises, the FTSE 100 rises as well, reflecting the higher market value of the included companies.

Companies that form the index must meet certain requirements besides having a sufficiently large market capitalisation, such as meeting certain tests on free float, liquidity, and nationality.

Besides the FTSE 100 Index, other indices in the United Kingdom include the FTSE 250 that includes the 250 largest companies by market capitalisation after the top 100 companies and the FTSE SmallCap that includes the remaining companies that didn’t make it to the FTSE 250 or FTSE 100. When combined, the FTSE 100, FTSE 250 and FTSE SmallCap form the FTSE All-Share Index.

Although the FTSE All-Share Index is more comprehensive, the most widely used index in the United Kingdom is still the FTSE 100. However, note that many of the largest 100 UK companies are international companies and focused on exports, which makes the FTSE 100 a poor measure of how the UK economy is performing.

The profitability of the largest UK companies is also closely tied to the exchange rate of the pound. The FTSE 250 or FTSE SmallCap are much better indicators of the overall health of the UK economy.

The FTSE 100 was launched on January 3, 1984, with a start value of 1,000. Since then, the Index has been updated every three months to add new companies that passed the threshold of the 100 largest ones, and to exclude those companies whose market capitalisation fell under that threshold.

What Companies Form the FTSE 100?
As noted earlier, the FTSE 100 consists of the largest 100 companies by market capitalisation in the United Kingdom. The following table shows the 20 largest companies in the FTSE 100 by market cap, as of March 16, 2020.

TABLE HERE

How is the FTSE 100 Calculated?
The value of the FTSE 100 Index is based on the total market capitalisation of all companies that are included in the index. The market capitalisation of a single company is calculated by multiplying the price of one share by the total number of shares issued by a company. As the price of the share rises during the day, the market capitalisation of that company rises as well and affects the value of the FTSE 100 Index.

All companies in the index are weighted by free-float capitalisation, which means that larger companies with more free-floating stocks have a larger impact on the index than smaller companies with less free-floating stocks.

The FTSE 100 Index is calculated in real-time throughout the day, although most investors and news mostly focus on the closing value for the day. The only days when the Index is not calculated continuously include UK public holidays and the period between the market close at 16:30 and the new market open at 8:00.

How to Invest in the FTSE 100?
Investors and traders who want to gain exposure to the FTSE 100 have different options at their disposal. A popular choice is ETFs, or exchange-traded funds, which are designed to track the performance of the underlying stock index. The advantage of using ETFs is that they often require a significantly smaller cash outlay that trying to create a portfolio that tracks the FTSE 100.

Popular ETFs include the HSBC FTSE 100 ETF, the iShares FTSE 100, the DBX FTSE 100, or the UBS FTSE 100 ETF. If you want to invest in a FTSE 100 ETF, bear in mind that the index has a high concentration of financial services companies which can increase your overall risk to that particular sector.

Besides FTSE 100 ETFs, investors who want a general exposure to the economy of the United Kingdom or Europe can also look into the MSCI UK Index Fund, the STOXX European Select Dividend Index Fund (with a focus on dividend stocks), or the SPDR DJ STOXX 50 ETF.

How to Trade the FTSE 100?
Traders who want to trade the FTSE 100 in the short-term are best served by CFDs that track the index. CFDs, or Contracts for Difference, are derivative contracts that track the price of an underlying security or stock index.

Traders who buy a CFD don’t own the underlying security, but only get exposure to the price movement of the underlying security. This approach has its advantages, such as being able to trade CFDs on high leverage. However, bear in mind that trading on high leverage doesn’t increase only profits, but also losses.

Day trading strategies for the FTSE 100 include breakout trading, trend-following, and counter-trend trading.

Breakout Trading on the FTSE 100
Breakout trading involves taking trades in the direction of a breakout above or below major technical levels. For example, when the FTSE 100 rises above an important daily resistance or falls below an important daily support, a breakout trader could take a long or short position on the index, respectively.

Chart patterns are also a popular way to trade breakouts on the FTSE 100. Patterns like double tops, double bottoms, or head and shoulders patterns often provide attractive reward-to-risk ratios for day trades.

The chart above shows a CFD on the FTSE 100 Index with a breakout trade. The price broke above a major daily resistance level and provided a nice buying opportunity in July 2016. Traders who missed the initial entry can still enter into the trade by waiting for a pullback to the broken resistance level that now acts as a support for the price.

Trend-Following the FTSE 100
Trend-following strategies refer to taking trades in the direction of the underlying trend. In essence, markets can trade in three states: uptrends, downtrends, and sideways. Trend-following traders would only look for buying opportunities when the overall trend is up and for selling opportunities when the trend is down. In general, trend-following traders avoid taking trades when the market is ranging. Uptrends can be easily identified by the price making consecutive higher highs and higher lows, while downtrends are identified by lower lows and lower highs.

Alternatively, traders can use the ADX indicator to identify the direction and strength of market trends. If the value of the ADX indicator is above 25, this signals that the market has started to trend.

A trend-following trade can be seen in the following chart. After the FTSE 100 formed a fresh lower high, a trader could enter with a short position after the price broke below the hourly support. If the entry is missed, there is still an opportunity to enter in the direction of the downtrend with the pullback to the horizontal support-turned-resistance that aligns with the 50% Fib level.

Final Words
The FTSE 100 Index, also called the “Footsie”, is a major stock market index that tracks the market capitalization of the 100 largest companies in the United Kingdom. The value of the Index is updated in real-time from 8:00 to 16:30 except during UK public holidays and when the markets are closed over the weekend.

Besides the FTSE 100, other major indices in the UK include the FTSE 250 that includes the next largest 250 companies in the UK and the FTSE SmallCap that covers all remaining public companies.

Investors who want to get exposure to the UK stock market by investing in the FTSE 100 can do so by buying ETFs that track the index, such as the HSBC FTSE 100 ETF or the iShares FTSE 100. Traders who want to speculate on the FTSE 100 in the short-term can take advantage of CFDs and the leverage provided with those derivative contracts.

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American Depositary Receipts or ADRs. These are shares of foreign companies listed on exchanges in the USA in dollars.

They allow US investors to get access to overseas shares without the hassle of having to exchange currency, open brokerage accounts overseas and so on.

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