What is the FTSE 100?
The FTSE 100, also known as the Financial Times Stock Exchange 100 Index or ‘Footsie’ for short, represents the top 100 companies by market capitalisation in the UK. The FTSE 100 includes big names you’ll likely be familiar with, like banks, oil and gas companies, pharmaceutical firms and more.
But how does the FTSE 100 work, exactly? And how do you invest in it?
Capital at risk. Past performance is not a reliable indicator of future results.
How does the FTSE 100 work?
The FTSE 100 evaluates all stocks listed on the London Stock Exchange by market capitalisation (sometimes called “market cap”). This is the total market value of a company’s outstanding shares. The 100 companies with the highest market cap are included in the index. The price of the index is then determined by changes to the individual stocks. Stocks with higher market capitalisation have more weight in the FTSE 100, meaning their performance has a bigger effect on the index’s price movements. Each company’s market capitalisation is reassessed every quarter and the index is adjusted if necessary.
What are the top companies in the FTSE 100?
At the time of writing, the top three companies in the FTSE 100 based on market capitalisation (market cap) are Astrazeneca, Shell and Unilever. However, market capitalisation can change from one day to the next, with companies regularly moving up and down the index. Energy, industrial goods and services, financial services and healthcare make up approximately 11% of the FTSE 100 index. It’s sometimes described as an “old economy” index because of the lack of technology companies in comparison to other indexes.
Why is the FTSE 100 index so important?
The FTSE 100 index is widely considered to be one of the most important indicators of the health of the UK stock market and economy. Investors often use it to assess market trends, make informed decisions and track the performance of the UK’s biggest companies. If you’re new to the stock market, investing in a FTSE 100 index fund can be a great way to get started. You’ll have a stake in the UK’s top companies for a fraction of the cost of buying these companies’ shares individually. Not only can this approach be more affordable, but by holding a diverse range of assets, it may also help reduce the impact of stock market volatility compared to investing in individual stocks.
Learn more: Should I get an ISA?
How to invest in the FTSE 100
There are a few different ways you can invest in the FTSE 100 index:
1. Investing in an index fund and ETFs
An index fund is a type of mutual fund or exchange-traded fund (ETF) that tracks the performance of a specific market index such as the FTSE 100. This tends to be less risky than purchasing stocks individually, as you can quickly build a diverse portfolio and avoid putting all your eggs in one basket. If a company within the index performs badly, its losses can often be offset by other companies’ gains.
To make your portfolio even more diverse, you could invest in a variety of funds and track indexes from around the world, including the Standard and Poor 500 (S&P 500) and Dow Jones Industrial Average (DJI).
To invest in an index fund or ETF, open an investment account with a provider, deposit money into that account and then choose a fund to invest in. If you want to invest in the FTSE 100, you simply need to look for an index or ETF that tracks the FTSE 100, and specify how much of your deposited funds you want to invest.
When you invest in the stock market, you may have to pay income tax and capital gains tax (CGT) on your profits. To protect your profits from the taxman, you can make the most of your annual ISA allowance, which currently stands at £20,000. You could invest the full £20,000 in a Stocks and Shares ISA each tax year, or you could spread your ISA allowance across multiple ISA types, including Cash ISAs, Cash Lifetime ISAs and Stocks & Shares Lifetime ISA.
Just keep in mind that the most you can save in a Lifetime ISA is £4,000 a year, but your savings will benefit from a 25% government bonus up to £1,000. You can only use your Lifetime ISA to purchase your first home or fund retirement, and you must be aged 18-39 to open one. Your LISA must also be open at least 12 months before you can use your funds to buy a house.
Learn more: What is a Lifetime ISA?
2. Buying individual shares
Another way to invest in the FTSE 100 is to purchase individual shares in the listed companies via an online investment platform. If your shares go up in value, you’ll make a profit when you sell them. You may also receive dividends, which you can either reinvest or use as income.
Remember that when you invest, profits aren’t guaranteed and you can lose money. Purchasing individual stocks can be one of the riskiest and most expensive ways of investing, but you can often reduce the risk and the cost by buying index funds or exchange-traded funds (ETFs), but this isn’t guaranteed.
When considering opening a LISA, remember that withdrawals for any purpose other than buying a first home or for retirement will incur a 25% government penalty, meaning you may get back less than you paid in. Tax treatment depends on individual circumstances and may be subject to change in the future
Invest for your future with our Stocks & Shares Lifetime ISA
Invest up to £4,000 per tax year in a high growth fund – and receive a 25% government bonus to boost your first home deposit or retirement pot up to £1,000.
