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You have probably heard the FTSE 100 mentioned in the news. But have you ever wondered what the FTSE 100 is and how it works? If so, read on.
FTSE stands for the Financial Times Stock Exchange. It was originally jointly owned by the Financial Times and the London Stock Exchange. It’s affectionately known as the ‘footsie’.
Companies listed on the London Stock Exchange are ranked in terms of their market value, or market capitalisation (known as market cap for short). The FTSE 100 is a list of the top 100 largest companies in terms of market cap.
You will probably have heard the FTSE 100 mentioned in the news in terms of a single figure that rises and falls in value.
The combined market cap of the top 100 companies is used to calculate a single figure. These companies are publicly listed and their value will change depending on their share price.
The figure changes throughout the day while the market is open, just like a share. The figure published in the evening news is its closing value at the end of that day.
In terms of market cap, the current top 10 biggest companies in the FTSE 100 are as follows:
Royal Dutch Shell – Oil and gas
HSBC Holdings – Banking and finance
BP – Oil and gas
GlaxoSmithKline – Pharmaceuticals
British American Tobacco – Tobacco
Unilever – Consumer goods
AstraZeneca – Biopharmaceuticals
Diageo – Alcoholic beverages
Barclays – Banking and finance
BHP Group – Minerals
Its performance is used as an indication of overall market conditions. It will change in response to political or economic events. This is because it responds to increasing or decreasing confidence in the market.
An excellent example of this was the fall in the FTSE 100 by more than 2,400 points from mid-February to mid-March 2020. The start of the Coronavirus pandemic prompted one of the largest falls in more than 30 years.
So, what is the FTSE 100 in the context of personal finances?
Even if you don’t invest in the stock market, its performance can still have an effect on your finances.
For example, its performance will have an influence on your situation if you pay into a pension scheme. Especially if you are close to retirement.
As shown by recent events, a sharp fall in the FTSE 100 could be an indication of an imminent recession, which will negatively affect the economy. This is the reason why it is watched so closely by economists and investors.
If you are wondering what scope there is for making money on the FTSE 100, there are a number of options.
You can’t invest in it directly, but you can trade on its performance. One of the most common ways is to invest in an index tracker fund.
The performance of the FTSE 100 is an important indicator of the general health of the economy. It is also a quick and easy way to gauge financial conditions at any particular point in time.
Further information about the companies in the index is available from the London Stock Exchange website.
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