What is the FTSE 100?
FTSE 100 is the name most people hear when the news talks about the UK stock market. It tracks 100 large companies listed in London, but it is not a full picture of the British economy.
The Short Version
- The FTSE 100 tracks 100 large companies listed on the London Stock Exchange.
- Bigger companies carry more weight, so a few large names can move the index.
- Many members earn a lot of revenue overseas, so it is not a clean UK economy tracker.
- Investors use it as a market gauge, an income source, and a simple index fund building block.
What the FTSE 100 actually tracks
The FTSE 100 is a stock market index. An index is a basket that tracks a selected group of shares. In this case, the basket contains large companies listed on the London Stock Exchange.
When the index rises, the combined value of those companies has usually risen. When it falls, the combined value has usually fallen. The number is a shortcut, not a full company by company story.
The London Stock Exchange FTSE 100 page publishes the live index level and market data. That is the figure you often see quoted in news bulletins.
Why bigger companies matter more
The index is weighted by market value. Market value means the share price multiplied by the number of shares in issue. Larger companies therefore have more influence.
This matters because it is not one company, one vote. A large oil, bank, healthcare, or consumer goods company can move the index more than several smaller members combined.
It also means the headline number can look calm while many members are having rough days. The largest companies can hide some of the movement beneath the surface.
If you are new to this, the guide to what a share is explains the ownership stake behind each listed company.
How companies get in and out
The membership is not fixed forever. FTSE Russell reviews the index regularly and applies published rules. Companies can move up into the index or down into another UK index.
The FTSE 100 constituents page shows the current members. It also notes that constituents are reviewed every quarter.
This review process matters for investors. If a company joins the FTSE 100, tracker funds may need to buy it. If it leaves, some tracker funds may need to sell.
Those forced flows can move prices in the short term. They do not always say much about the quality of the underlying business.
Why it is not the whole UK market
The FTSE 100 is often described as the UK market. That is only partly true. It is really the large company end of the UK listed market.
Many members sell goods and services around the world. Some earn more outside the UK than inside it. That makes the index more global than many beginners expect.
The FTSE 250 can sometimes tell you more about the domestic UK economy. It includes the next largest listed companies and tends to have more UK-facing businesses.
This is why the FTSE 100 can rise on a day when UK economic news looks weak. Currency moves, oil prices, bank earnings, and overseas sales can all matter.
Why the index moves
The index moves when investors change what they will pay for its members. Company profits matter, but so do interest rates, currencies, commodity prices, and market mood.
A weaker pound can help companies that earn dollars or euros. Higher oil prices can help energy firms. Rising interest rates can change what investors will pay for shares.
The guide to why share prices move explains this in more detail. The same logic applies to an index, just across many companies.
Dividends also matter. The FTSE 100 has often been watched by income focused investors because many large members pay regular dividends. Those payments are never guaranteed.
How investors usually get exposure
Most private investors do not buy every company in the index themselves. They usually use a tracker fund or exchange traded fund. That fund tries to copy the index.
This can be cheap and simple. The compromise is that you accept the index exactly as it is. You get the strong parts and the weak parts together.
A tracker also does not protect you from market falls. If the large UK listed companies fall together, the fund should fall too. That is what tracking means.
Before using any index fund, check what it owns and what it costs. Then ask how it fits with the rest of your portfolio. A cheap fund can still be a poor match if it doubles up on exposures you already have.
Also check whether the fund distributes dividends or reinvests them. Income units pay cash out. Accumulation units roll income back into the fund. The right choice depends on what you need the fund to do.
Costs, tax wrappers and diversification still matter. A Stocks and Shares ISA can shelter gains and income from UK tax, but it does not remove investment risk.
A Worked Example
Imagine the pound falls against the dollar. A large company in the FTSE 100 earns much of its revenue in dollars. Those overseas earnings are now worth more in pounds.
Investors may decide the company looks more valuable in sterling terms. Its share price rises. Because the company is large, that one move can lift the index.
Now imagine several large global companies move the same way. The FTSE 100 may rise even if UK household spending is weak. That can look odd until you know what the index owns.
The lesson is simple. The index level is useful, but it always needs context. Ask which sectors and companies caused the move.
What This Means For You
For a UK investor, the FTSE 100 can be useful. It is familiar, cheap to track through funds, and built around large listed companies. It can also be too narrow on its own.
A fund that tracks only this index will miss many global growth companies. It will also lean towards the sectors that dominate the UK large company market.
That does not make it bad. It means you should know what role it plays. A FTSE 100 fund is not the same as a global tracker or a full UK market fund.
If you are comparing income, the guide to what a dividend is explains why yield alone can mislead. A high yield is not always safer income.
In Plain English
The FTSE 100 is a scoreboard for 100 large companies listed in London. It tells you something useful about the market, but it does not tell you everything.
It is not a perfect measure of the UK economy. It is a large company index with global businesses, sector quirks, dividend history, and regular membership changes.
Use it as a guide, not a verdict. If you want to understand the wider system, read how the stock market actually works.
This article is for informational purposes only and does not constitute financial advice. Investment values can go down as well as up. Always do your own research before making any financial decisions.