If you are interested in trading stocks in the UK, you have probably heard of the FTSE indices. The Financial Times Stock Exchange (FTSE) is a series of indices that provide information on the performance of various companies listed on the London Stock Exchange. Understanding the FTSE indices is crucial for traders who want to navigate the UK stock market successfully, diversify their portfolio with indices, and increase their overall knowledge of local financial markets.
In this article, we will take a closer look at what the FTSE is, what the indices are, and how you can make the most informed decision before trading. If you would like to get started in stocks investing, you can create a trading account with a reputable broker licensed in the UK.
What are the FTSE Indices?
The FTSE stands for the Financial Times Stock Exchange, and it is pronounced ‘footsie’ by traders. It is a series of benchmark indices that measure the performance of companies listed on the London Stock Exchange. The London Stock Exchange Group owns the FTSE Group, and the latter maintains and calculates the indices.
The most well-known index in the series is the FTSE 100, which consists of the top 100 companies listed on the London Stock Exchange by market capitalisation. Other indices in the FTSE series include the FTSE 250, FTSE 350, and FTSE All-Share.
What the FTSE indices represent
In general, the FTSE indices represent the overall performance of the UK stock market. They provide valuable information for local and global traders on the performance of various sectors and industries and are used by investors to track the health of the UK economy. They also provide a basis for investment products such as Exchange-Traded Funds (ETFs) and index funds, as these products aim to replicate the performance of the FTSE indices to allow investors to gain exposure to the UK stock market.
How the FTSE indices are calculated
The FTSE indices are calculated using a market capitalisation-weighted methodology. This means that companies with higher market capitalisations have a greater impact on the index’s performance. The index is updated every fifteen seconds during trading hours, and it is published in real-time.
The FTSE indices are rebalanced quarterly. This ensures that the companies included in the index remain representative of the market. Companies that have grown larger in terms of market capitalisation may be added to the index, while those that have decreased in size in the same period may be removed.
A closer look at the FTSE indices
The most popular FTSE indices include the FTSE 100, the FTSE 250, the FTSE 350, and the FTSE All-Share. Below, we examine them more closely.
The FTSE 100
The FTSE 100 is the most popular index out of the series, and investors often use it as a benchmark for the UK stock market. Many investment funds also use it as a basis for their performance measurement. The index consists of the largest 100 companies on the London Stock Exchange by market capitalisation.
The FTSE 250
Similarly, the FTSE 250 includes the largest 250 companies on the London Stock Exchange by market capitalisation, and this index ranks immediately below the FTSE 100.
The FTSE 350
The FTSE 350 is a combination of the FTSE 100 and FTSE 250 indices, and they track the same companies those two indices track. Investors may choose to track the performance of the FTSE 350 instead of the former two, because it covers approximately 90% of the market capitalisation of the UK equity market. The FTSE 350 also includes performance-tracking for large-cap, mid-cap, and small-cap companies, unlike the former two. This index thus gives investors a more well-rounded idea of how the UK market is performing overall.
The FTSE All-Share
The FTSE All-Share is the broadest of this series of indices, encompassing the 600+ companies that make up the London Stock Exchange. It includes all companies tracked by the FTSE 100, the FTSE 250, and the FTSE SmallCap indices. It also includes some companies that are not included in those indices. This makes it the broadest measure of the performance of the UK equity market, and some traders track its performance because it gives them a gauge of the overall health of the national economy.
How to invest in the FTSE indices
If you are interested in investing in the FTSE indices, there are a few ways to do so. Since traders cannot trade indices directly, financial organisations and institutions have come up with alternative instruments that seek to replicate them by tracking the performance of the same companies they track. Below are some popular investment instruments you can purchase.
Exchange-Traded Funds (ETFs)
ETFs are a type of investment fund that tracks the performance of an index. This includes the FTSE 100, the FTSE 250, and others. Investors can trade them on stock exchanges just as they would equities, and they provide a relatively simple way for traders to invest in the performance of an index.
Some examples of ETFs that track the FTSE 100 index include the iShares Core FTSE 100 UCITS ETF (ISF), which is one of the largest and most popular ETFs. It has a low expense ratio and provides exposure to the largest companies on the London Stock Exchange. Another is the Vanguard FTSE 100 UCITS ETF (VUKE), managed by Vanguard, a leading provider of low-cost index funds and ETFs.
Index funds are like ETFs in that they track the performance of an index. However, investors buy and sell them differently. Investors typically trade index funds directly through a fund manager, rather than on a stock exchange.
Some examples of index funds that track the FTSE 100 index include the Legal and General UK Index Fund (Class C), the HSBC FTSE 100 Index Fund (Class C), and the BlackRock Consensus 100 Fund D Acc.
An advantage of investing in index funds is that they provide exposure to a wide range of companies, which helps to reduce the overall risk of trading. Index funds also generally have lower fees compared to actively managed funds, making them a cost-effective way to invest in the UK equities market.
A third way you can trade the FTSE indices is to replicate the proportion of the companies they track as part of your investment portfolio, through buying individual shares from companies. This is probable in theory.
However, it can be riskier than investing in ETFs or index funds, as the performance of individual stocks can be more volatile. It also requires more manual work in terms of selecting and purchasing the shares from individual companies. Finally, as the indices are market capitalisation-weighted, this means the list of companies they track can change from time to time. This further complicates the process of your investment.
Some final words
Understanding the FTSE indices is essential for traders who want to navigate the UK stock market successfully. The indices provide information on the performance of various companies listed on the London Stock Exchange, and they are used by investors to track the health of the UK economy. By keeping an eye on the FTSE indices and understanding how they are calculated, traders can make more informed trading decisions and increase their chances of success in the UK stock market.