What it means
The FTSE 100 is built and maintained by FTSE Russell, which is part of the London Stock Exchange Group. The 100 companies are chosen by size, measured by market capitalisation (the share price multiplied by the number of shares in issue), and the list is reviewed regularly so that companies can enter or leave.
Each company is weighted by the value of its shares that are freely available to trade, so bigger companies move the index more than smaller ones. This means a handful of very large names can account for a big share of the daily movement.
News reports often quote the index in points, such as "the Footsie rose 60 points", which is only meaningful alongside the level it started from. The index matters to business people because many of its members earn most of their revenue overseas.
Because of that, the Footsie often reacts to global events and to exchange rate moves, not only to news about the UK economy. A weaker pound, for example, tends to lift the sterling value of overseas earnings and can support the index.
Footsie also serves as a benchmark. Fund managers compare their returns with it, index funds and exchange traded funds copy it, and derivatives such as futures are priced from it.
Companies sometimes mention it in annual reports to show how their share price performed against the market. It is worth remembering that the Footsie is a view of large companies only.
It does not represent small and medium-sized firms, and its sector mix is different from the wider economy. Looking at it alone gives a partial picture of UK business conditions.
Journalists and economists use the Footsie as shorthand, but analysts often look at related indices too. The FTSE 250, for example, covers the next tier of companies by size and tends to be more tied to the UK economy, so the two together give a fuller reading of how British business is doing.
In practice
Real-world examples.
Example
A UK-listed pharmaceutical company reports its annual results and notes that its share price rose 12% while the Footsie rose 4%. The finance director presents this as outperformance of 8 percentage points to the board.
Example
A pension fund manager in Manchester holds a fund that tracks the Footsie. When the index falls 3% in a week, she explains to trustees that the fund fell by roughly the same amount, less a small tracking difference.
Example
A small exporter selling machinery in the United States watches the Footsie headline each morning. She knows that when sterling weakens, the index often rises, and the same move helps her margins when dollar sales are converted back. The comparison helps her explain results in simple terms to non-specialist directors.
Formula
Calculation
Percentage change in the index = (closing level - opening level) / opening level x 100
Suppose the Footsie opens a week at 8,000 points and closes at 8,160 points. The change in points is 8,160 - 8,000 = 160 points. As a percentage, 160 / 8,000 = 0.02, and 0.02 x 100 = 2.0%. The same 160-point move on a base of 4,000 would have been 4.0%, which is why the percentage is more useful than the points.Case study
Seen in the real world.
Marlow Instruments is a fictional engineering company considering a listing in London. Its chief financial officer wanted to understand how its shares might be compared with the market, so she studied how the Footsie was used by investors. She learned that it was a benchmark for very large companies, while a company of Marlow's size would sit in a different index.
She prepared an illustrative table comparing Marlow's expected share price movement with both the Footsie and a mid-sized company index. The mid-sized index turned out to be a fairer comparison because the firms in it faced similar growth and funding conditions.
The board agreed to quote the mid-sized index in investor presentations and to mention the Footsie only as a market-wide reference. The exercise saved the company from making an unfair comparison that investors would have questioned. Her colleagues were surprised to learn that the choice of benchmark could change how the same share price performance looked to shareholders, and it became a standing item in the annual planning cycle.
Watch out
Common mistakes.
- Assuming the Footsie measures the whole UK economy, when it covers only 100 large listed companies.
- Reading a points change without checking the starting level, which makes the move look bigger or smaller than it is.
- Believing the index only reacts to UK news, when many members earn most of their income abroad.
Questions
People also ask.
Is the Footsie the same as the FTSE 100?
Yes. Footsie is simply the spoken nickname for the FTSE 100 Index.
Who decides which companies are in the Footsie?
The index provider, FTSE Russell, applies published rules that rank companies by market capitalisation and reviews the list on a regular schedule.
Can I invest directly in the Footsie?
You cannot buy the index itself, but you can buy funds and exchange traded funds that copy it.
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