How to Invest in the FTSE 100 (UK 100)
This overview is dedicated to the structure of the FTSE 100 and the ways of investing in the index. The FTSE 100 is a leading stock index in the UK that reflects the dynamics of the stock price of the 100 largest companies on the London stock exchange.
History of the FTSE 100
The British FTSE 100 (Financial Times Stock Exchange Index) is one of the leading European share indices. It is an indicator of the British economy, calculated by the company FTSE Group. The calculation is based on the stock prices of the 100 largest British companies listed on the LSE. The index, as indicated by the name, was created by the world's largest business publication – The Financial Times. In trading slang, it is referred to as the "Footsie".
The FTSE 100 was calculated for the first time in 1984, with a starting point of 1,000 points. Later on, the index kept growing steadily, with major corrections in the crises of 2008 and 2020. The index reached its high in 2018 at 7,900 points, with the stock quotes currently near 7,100.
Continuous trading starts in the LSE at 08:00 and finishes at 16:30 UTC. To qualify for inclusion in the FTSE 100, a company must comply with the requirements of the FTSE Group:
- It must be fully listed on the London Stock Exchange and traded with a price in Pounds Sterling or Euro on the electronic trade service of the exchange
- It must have passed certain tests for nationality, capitalisation, and liquidity
10 leading companies on the FTSE 100
When calculating the UK 100 index, companies are weighed up by their market capitalisation: the larger the company, the more it weighs on the index, and the more it influences the stock quotes of the index. Hence, whenever the stock price of the largest companies listed in the "footsie" changes, the impact on the whole index is stronger than that of the price changes of companies with a smaller capitalisation.
10 companies that mostly influence the FTSE 100:
- Royal Dutch Shell (EDSA)
- HSBC Holdings (HSBA)
- British Petroleum (BP)
- GlaxoSmithKline (GSK)
- British American Tobacco (BATS)
- Unilever (ULVR)
- AstraZeneca (AZN)
- Diageo (DGE)
- Barclays Bank (BARC)
- BHP (BJP.L)
When the stocks of the leading companies grow, the FTSE 100 grows alongside them. If they fall, it falls too.
Whenever the stock price changes, market capitalisation will change, too. Once in a quarter, the FTSE Group reviews the index, checking if the companies still remain compliant with the requirements.
Below are the main fundamental factors that influence the stock prices of the index:
- The overall situation in the worldwide markets: if the dynamics are positive, the "footsie" tends to grow
- Important economic and political events in the UK, such as Brexit or the Prime Minister elections
- Speeches and comments of the main politicians: the Queen, Prime Minister, the head of the Bank of England
- Report on profits and losses: corporate reports might be of great importance
- Commodity prices: some companies inside the index trade commodities, so price fluctuations might reflect in their quotations
The index is quite universal and suitable for short-term and long-term investments. The following financial instruments are good to work with the FTSE 100: stocks, futures, options, CFDs, and ETFs. To analyse the market and make decisions, use technical or fundamental analysis, or both.
Investing with the use of fundamental analysis
This approach presumes analysing fundamental factors that influence the stock quotes of UK 100. Investing might be short-term, based on corporate reports, or long-term, based on the expectations that the global economy will restore after another crisis.
- In the 2020 crisis, the index dropped from about 7,300 to 5,000
- When the decline was over, and the global economy started recovering alongside stock markets, investments in the UK 100 resumed with investors counting on its return to the pre-crisis levels
Investing with the use of tech analysis
This method is based on the FTSE chart. Try either classic tech analysis or original methods (Elliott's wave theory, Linda Raschke's strategies, Bill Williams's strategies, etc.). Also try using price or candlestick patterns, Price Action patterns, etc.
- When the index was falling in 2020, the Flag price pattern formed, meaning that the current trend would continue
- When the price breaks through the pattern line down, it is possible to open a short-term sell position with the expectation of a further decline in the stock quotes
Indicator strategies also work well with the "footsie". In this case, orders are based on signals from various trading indicators. Normally, one complicated indicator is used, or several simple indicators. With indicators, you can even make your investing automatic, creating expert advisors (trading robots).
- Let's take a simple indicator strategy, Golden Cross, which was previously described in an article
- On H1, a signal was formed to buy – the fast yellow EMA(50) crossed the slow blue EMA(200) from below
- In this case, a buy position is opened, which can be closed when the indicator lines cross back
The FTSE 100 is based on the stock price of the 100 largest companies on the LSE. This is one of the leading global stock indices that reflects the situation in the British stock market.
The UK 100 can be used for either short-term or long-term investments via various financial instruments. You can use fundamental or technical analysis or indicator strategies for analysing and making decisions.
* Past performance does not predict future returns