Financial Dictionary - FTSE 100
The FTSE 100 or Financial Times Stock Exchange is the stock market index comprising the 100 largest companies listed on the London Stock Exchange (LSE). It therefore shows the financial performance of the 100 largest companies by market capitalisation in the United Kingdom.
The index was created in 1984 with a starting point of 1,000 basis points. Nowadays, this indicator includes the likes of HSBC, Astra Zeneca, BP, GlaxoSmithkline, Barclays, Rolls Royce and Vodafone, and the 100 companies that comprise the index account for more than 70% of the total market value of the stocks listed on the London Stock Exchange.
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It's calculated by weighing the value of these 100 companies' shares and adjusting the free float via certain restrictions. When their stock prices rise, the value of their businesses rises without necessarily raising their capitalisation. In the same way, if the share price falls, the capitalisation of the whole will fall, although not all companies will suffer the fall.
How the FTSE 100 works
The composition of the FTSE 100 index varies over time, and it does not always feature exactly 100 companies. Companies may leave to make room for others as their market capitalisations fall or rise, or sometimes in response to a particular circumstance or event.
Broadly speaking, upswings typically occur during periods of economic expansion in the country, and vice versa, though this is not always the case because not all of the companies included on the index are British, but are required to be listed on the London Stock Exchange. In other words, they may be foreign companies that are simply headquartered in the country but earn their revenues abroad.
The index is calculated as a weighted average, meaning that the weight of each company within the index —or the weight assigned to each company for the purpose of calculating the index— will vary based on its market capitalisation, adjusted by the number of shares outstanding (free float).