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Definition of FTSE 100: Meaning, Composition, and Strategies
Definition of FTSE 100: Meaning, Composition, and Strategies

Definition of FTSE 100: Meaning, Composition, and Strategies

The FTSE 100 index is one of the most popular choices for traders around the world. It represents the UK’s top 100 companies and serves as a measure for the broader UK market. Since it is comprised of a large number of individual stocks, it produces a reliable signal in comparison to the American Dow Jones or the German DAX.

What Does FTSE Stand For?

FTSE is short for Financial Times and Stock Exchange, which refers to their joint ownership over the company. The FTSE Group maintains financial indices to measure sections of the overall stock market. Information on how a particular market segment is performing and gives traders and investors invaluable insight.

The most well-known index produced by the FTSE Group is the FTSE 100. It embodies the overall performance of the 100 major companies in the United Kingdom listed on the London Stock Exchange (LSE). It provides a snapshot of the most highly capitalized 'blue-chip' companies, meaning they are trusted and recognized.

Understanding the FTSE 100

Keyboard buttons "FTSE 100", "BUY", "SELL"

Every constituent of the FTSE 100 Index participates in the London Main Market. Combined, they account for about 80% of the total value of all publicly traded companies within the LSE. Currently, the top 10 companies that belong to the index include:

 

NameIndustryWeight (%)
HSBCBanks6.79
BPOil & Gas Producers5.52
Royal Dutch Shell AOil & Gas Producers5.5
AstraZenecaPharmaceuticals & Biotechnology5.12
Royal Dutch Shell BOil & Gas Producers4.82
GlaxoSmithKlinePharmaceuticals & Biotechnology4.59
DiageoBeverages4.18
British American TobaccoTobacco3.69
UnileverPersonal Goods2.86
Rio Tinto GroupMining2.49

 

The composition of the FTSE 100 index is revisited every quarter. The review usually takes place on Wednesdays following the first Friday in March, June, September, and December. Any numbers and values used in the calculation are taken from the night before. The methodology relies on price changes of underlying constituents.

As has been said, market capitalization is a defining factor by which companies make the list. However, there are other conditions for being featured in the index:

  • Being quoted on the LSE
  • Staying compliant with the company’s origin and liquidity ratio
  • Remaining publicly traded stocks.

If it turns out, a company doesn't meet all of the requirements, it gets taken out. The composition always includes 100 companies, which is why a new one is added to the list. Obviously, it must meet all the rules mentioned above.

Factors Influencing the FTSE 100 Index Price

Trading chart on tablet

The price of the FTSE can be affected by a variety of events around the world. The most influential factors include:

  • News regarding GDP
  • UK manufacturing statistics
  • Events that take place in the Middle East
  • Any global news, especially somehow relating to specific industries from the list.
  • Economic and political shifts

Advantages and Disadvantages of FTSE 100

Just like any financial asset and instrument, the discussion around FTSE 100 has arguments both in favor of and against it. The upsides include:

  • You receive instant exposure to the top companies in the UK with established positions in their respective industries.
  • It allows you to diversify your portfolio.
  • FTSE 100 tends to be cheaper to track.
  • There is no stock-specific risk sine you have a composition of a 100.

It is essential also to mention the downsides associated with this style of trading:

  • Some stocks have high levels of debt.
  • There is minimal technology representation in the composition.
  • You may be conflicted about investing in the companies that make warships, produce tobacco and alcohol.

What Is FTSE 100 CFD Trading?

If you want to trade FTSE with CFDs, there aren’t drastic differences with traditional trading strategies. You can set stop loss and limits, enter short or long trades, etc. Depending on your predictions, you can speculate on the index price in either direction.

What Is CFD Trading?

The acronym CFD stands for contract for difference. It is a financial instrument that allows you to trade assets, which in our case is the FTSE 100 index. One of the main distinguishing features of CFDs is that there is no actual delivery of the instrument, which is being traded. When a trader acquires CFDs and then sells the contract, they make a profit due to price fluctuations for this asset.

Advantages and Disadvantages of FTSE 100 CFD Trading

Let’s take a quick look at what makes CFD an attractive way to work with the FTSE index. Major benefits for a trader include:

  • Offers leverage – For example, if you have a 1 to 100 leverage, you can make 100 times more money than you would without it
  • Suits beginner investors – You only need to place a small deposit to start. Leverage helps you significantly increase your investment capital when the market is not moving in your favor
  • Varying contract sizes – Until you are confident in your skills and knowledge, you can start trading with smaller trade sizes. It allows you to minimize the consequences of any mistakes you make
  • Provides flexibility – The instrument offers you opportunities for different future values of the asset. Whether you expect an increase or decrease in the value, you can use it to your advantage.

Keeping all the advantages in mind, it is crucial to be aware of the risks involved. The biggest risk is the downside of using leverage. If the market behaves differently than you anticipated, your losses may increase. Another disadvantage is large spreads, which can also affect your losses. However, if you apply the right approach, you can manage and offset these risks.

FTSE 100 CFD Trading Strategies

Men study trading charts on monitors.

When trading FTSE 100, you always need to make a thorough analysis and accurate charting. It is recommended that you use the moving average and RSI in your analysis. In any case, be cautious when choosing a particular strategy:

  • Bullish strategy – Use the indicators mentioned above and always apply a stop loss. You can use this strategy when the price has reversed or is already going down. However, the latter is riskier and more aggressive.
  • Bearish strategy – You can use it for short-term as well as long-term trading. A stop-loss would also be useful; you can also move the stop-loss if you have enough deposit.

Conclusion

The FTSE 100 gauges the overall sentiment, in the UK market, based on the most capitalized companies. It has great prospects for making profits, which makes it such as a widely traded instrument.

This index is an interesting and complex instrument to trade with. If you want to try it out without risking money, open a free demo account on Libertex. Having theoretical knowledge is essential – but you will achieve success only by practicing. We are here to help you develop your skills in a controlled environment.

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