Ftse 100: Meaning, Criticisms & Real-World Uses

What Is FTSE 100?

The FTSE 100, often informally called "Footsie," is a prominent stock market index that represents the 100 largest blue-chip companies listed on the London Stock Exchange (LSE) by market capitalization. It is a key benchmark within the broader financial category of equity indices, serving as a primary indicator of the performance of major UK-listed companies and the overall health of the UK equity market. The FTSE 100 is maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group⁷⁴.

History and Origin

The FTSE 100 was launched on January 3, 1984, with an initial value of 1,000 points⁷², ⁷³. Its creation was a joint venture between the Financial Times and the London Stock Exchange, which is where the "FTSE" name originates⁷⁰, ⁷¹. This new index quickly gained traction as the UK equity market's first real-time index, meeting the demand for more up-to-date market information and benefiting from a significant expansion of equity trading⁶⁸, ⁶⁹. It replaced the older FT 30 index as the main guide for UK stock market performance⁶⁶, ⁶⁷. The FTSE 100's daily movements soon became a staple of evening news bulletins, solidifying its role as a widely recognized measure of the UK market's health⁶⁴, ⁶⁵.

Key Takeaways

The FTSE 100 is a market capitalization-weighted index of the 100 largest UK companies listed on the London Stock Exchange.⁶³
It serves as a key benchmark for the UK equity market and is calculated in real time.⁶²
The index's constituents are reviewed quarterly, leading to potential changes in its composition.⁶¹
Investing in the FTSE 100 can be achieved through various financial instruments, including index funds and exchange-traded funds (ETFs).⁶⁰
Due to the multinational nature of many of its constituent companies, the FTSE 100's performance is significantly influenced by global economic conditions and currency exchange rates, rather than solely the UK economy.⁵⁸, ⁵⁹

Formula and Calculation

The FTSE 100 is a market-capitalization weighted index. This means that companies with larger market capitalizations have a greater influence on the index's value than smaller ones⁵⁶, ⁵⁷. The calculation involves summing the free-float adjusted market values of all constituent companies and then dividing by a continuously adjusted divisor⁵⁵.

The basic principle can be represented as:

\text{Index Value} = \frac{\sum (\text{Share Price}_i \times \text{Number of Shares Issued}_i \times \text{Free Float Factor}_i)}{\text{Divisor}}

Where:

(\text{Share Price}_i) represents the current share price of company (i).
(\text{Number of Shares Issued}_i) refers to the total number of shares a company has released.
(\text{Free Float Factor}_i) is the percentage of shares readily available for trading in the market, excluding restricted stocks like those held by company insiders.
The (\text{Divisor}) is a figure adjusted to maintain the continuity of the index value when changes occur, such as corporate actions or constituent changes⁵⁴.

The market capitalization of each company is reviewed quarterly, and adjustments are made to the index composition if necessary⁵², ⁵³.

Interpreting the FTSE 100

The FTSE 100 is widely considered a barometer for the UK stock market and, by extension, a general indicator of investor sentiment and confidence in the UK economy⁵⁰, ⁵¹. When the FTSE 100 rises, it generally suggests that the aggregate share prices of its constituent companies are increasing, often signaling positive market conditions⁴⁹. Conversely, a falling FTSE 100 can indicate that these companies (and potentially the wider economy) are experiencing a period of contraction⁴⁸.

It is important to note that while the FTSE 100 is a UK index, many of its largest companies are multinational giants with significant international operations⁴⁷. Approximately 75% to 80% of the FTSE 100's revenue comes from overseas markets, meaning its movements are not solely a reflection of the domestic UK economy⁴⁵, ⁴⁶. Instead, its performance is often influenced by global economic indicators and exchange rates, particularly the strength or weakness of the pound sterling⁴³, ⁴⁴. This global exposure provides a degree of portfolio diversification for the index itself.

Hypothetical Example

Imagine an investor, Sarah, is tracking the performance of the UK market. On Monday, the FTSE 100 closes at 7,500 points. Over the next day, several large companies within the index, such as a major energy sector firm and a global financial services provider, announce strong earnings reports. This positive news drives up their respective share prices. Due to their significant weighting in the index, these individual company gains contribute substantially to the overall index value. By Tuesday's close, the FTSE 100 could rise to 7,550 points, indicating an upward movement of 50 points. Sarah, observing this, would interpret it as a general positive trend among the largest UK-listed companies.

Practical Applications

The FTSE 100 has several practical applications in the financial world:

Benchmark for Performance: It serves as the primary benchmark for assessing the performance of the UK stock market and large-cap UK equities⁴¹, ⁴². Fund managers often compare their portfolios' returns against the FTSE 100 to gauge success.
Investment Vehicle: Investors can gain exposure to the FTSE 100 without buying individual shares in all 100 companies. This is commonly done through index funds or exchange-traded funds (ETFs) that passively track the index's performance³⁸, ³⁹, ⁴⁰. These funds aim to mirror the FTSE 100's returns by holding its constituent stocks in the same proportions.
Derivatives Trading: The FTSE 100 is widely used as an underlying asset for derivatives such as futures contracts and options contracts, allowing traders to speculate on its future price movements or hedge existing positions³⁷. These contracts are traded on exchanges like ICE Futures Europe (formerly LIFFE).
Economic Barometer: While not a pure reflection of the domestic UK economy, the FTSE 100 provides insights into the health of major companies with substantial global reach³⁵, ³⁶. Its movements can signal broader trends in international trade and currency markets. For example, in April 2025, the index surged following optimistic news around US-UK tariff negotiations and robust earnings reports from banks and travel companies, illustrating its sensitivity to global events.³⁴

Limitations and Criticisms

Despite its prominence, the FTSE 100 faces certain limitations and criticisms:

Limited UK Economic Representation: A significant criticism is that the FTSE 100 is not a strong indicator of the purely domestic UK economy³³. A large portion of the revenue generated by FTSE 100 companies comes from overseas, making the index more susceptible to global economic trends and currency fluctuations than to local economic conditions³¹, ³². The FTSE 250, composed of the next 250 largest companies, is often considered a better gauge of the UK domestic economy.³⁰
Sector Concentration: The FTSE 100 can be heavily weighted towards certain traditional sectors, such as energy sector, financial services, and consumer staples²⁹. Critics argue it has limited exposure to rapidly growing technology companies compared to other major global indices like the S&P 500, which can affect its growth potential²⁷, ²⁸. This has led to historical underperformance compared to some international peers²⁶.
Volatility: While often seen as stable due to its large-cap constituents, the FTSE 100 can still experience significant volatility driven by global events, geopolitical shifts, or major market incidents like the 1987 Black Monday crash, when the index fell 21.73% in two days.
Historical Performance: Some analysts point to the FTSE 100's modest progress since its peak in December 1999, attributing it partly to initial overvaluation of tech, media, and telecom stocks that later underperformed, leaving the index underweight in these sectors when they rebounded²⁵.

FTSE 100 vs. FTSE 250

The FTSE 100 and FTSE 250 are both key UK equity indices, but they differ significantly in their composition and implications for investors.

Feature	FTSE 100	FTSE 250
Constituents	Top 100 largest UK companies by market capitalization.²⁴	Next 250 largest UK companies after the FTSE 100.
Market Cap Focus	Primarily large-cap companies.²³	Mid-cap companies, with some small-cap exposure.²²
International Bias	High; a large proportion of revenue comes from overseas operations.²¹	Lower; more focused on domestic UK economic activity.¹⁹, ²⁰
Volatility	Generally considered more stable due to larger, established companies.¹⁸	Typically exhibits higher volatility due to smaller company sizes.¹⁷
Growth vs. Income	Often favored for income generation due to consistent dividend yield from mature companies.¹⁵, ¹⁶	Often seen for higher growth potential, albeit with increased volatility.¹³, ¹⁴
UK Economy Indicator	Weaker indicator of the purely domestic UK economy.¹²	Stronger reflection of the domestic UK economy.¹¹

While the FTSE 100 is the most widely quoted UK stock market index, the FTSE 250 provides a different perspective, particularly for those interested in companies more directly tied to the UK's internal economic landscape¹⁰. Investors often choose between them, or a combination, based on their risk tolerance and investment objectives⁹.

FAQs

What does FTSE stand for?
"FTSE" stands for Financial Times Stock Exchange. It originated from the joint venture between the Financial Times and the London Stock Exchange that created the index in 1984.⁷, ⁸ The informal nickname "Footsie" is a common way to refer to the FTSE 100.

How often do the companies in the FTSE 100 change?
The companies included in the FTSE 100 are reviewed quarterly. During these reviews, some companies may exit the index, and others may enter, based on changes in their market capitalization and other eligibility criteria.⁶

Can I invest directly in the FTSE 100?
You cannot directly invest in the index itself, as it is a measure, not a tradable asset. However, investors can gain exposure to the FTSE 100's performance by investing in index funds or exchange-traded funds (ETFs) that track the index, or by purchasing individual shares of its constituent companies.³, ⁴, ⁵

Why is the FTSE 100 considered important?
The FTSE 100 is important because it serves as the primary benchmark for the performance of the largest companies listed on the London Stock Exchange. It offers a valuable insight into the UK's corporate health and its engagement with the global market, making it a significant indicator for investors and media outlets alike.¹, ²