Often pronounced as ‘footsie’, the ‘Financial Times Stock Exchange’ index is a share index of the top 100 companies listed on the London Stock Exchange by market capitalization. Now you might be wondering why people trade indices, there are several reasons. Indices usually track the price movements of a collection of stocks. Not 4 or 5, but a number that usually goes into double and sometimes triple digits. The benefit of trading an index is that your risk is far more diversified than investing in a single stock. Think about it, if an index is tracking the price of 100 different companies that operate in completely different sectors, its volatility is going to be significantly lower than the value of a single stock. The FTSE 100 is another such index.
Similar to the S&P 500 index, one may be tempted to consider the FTSE 100 as a goo representation of the UK market. Although it tracks prices of 100 blue chip stocks listed in the United Kingdom, several of those companies are very international. For this reason, the FTSE 100 isn’t always considered as the best indicator of the performance of the UK market. It is however, a very popular and highly liquid product used by traders across the world.
Some of the factors impacting the price of the index include performance of individual stocks. Stocks with a higher market cap are assigned larger weights on the index. Thus, a very positive or negative performance from one of the larger companies can result in the index being impacted as well.
If you’ve been reading our blog posts, you’ll be familiar with how macro-economic factors can affect entire industries. Take for example OPEC taking a call to restrict the global supply of oil. This increase in oil prices would have a negative impact on industries such as airlines. If the FTSE 100 has several airline stocks listed on it at that point in time, theoretically a move by OPEC would have a negative affect on the entire index, or would it?
The Royal Dutch Shell company is another stock listed on the FTSE 100. In fact, is has one of the higher weights, this could counteract the negative affect from the rise in prices in airlines. How the index reacts overall, I personally cannot comment as I’m not an expert. What I can tell you, is that you’re probably better off holding an index at such an event vs. a single airline stock.
If you are keen on trading the FTSE 100 something that you should keep a close eye on is politics. The ‘Brexit’ saga has been something of a roller coaster, not just for the citizens of the UK but for several industries in the UK and the EU. As I mentioned before, the FTSE 100 has several companies that are also international facing. If a no-deal Brexit were to occur, one might expect several existing trading agreements to be dissolved which would cause huge disruptions while new agreements are put into place. As a direct result of this, one could expect a decline in the FTSE 100 index due to a fall in the prices of the underlying stocks.
A final factor that we’d like to mention is the treatment of dividend. We are throwing this in because of a lot of our customers asked us ‘how is dividend treated on an index’. When dividends are confirmed or estimated on a particular stock, the confirmed or estimated values are applied on the ex dividend date. Regular cash dividends are reinvested in the index on the ex-dividend date.
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