What Is the FTSE 100?

At Towerstone, we provide specialist crypto accountancy services for UK investors and businesses. We have written this article to explain what the FTSE 100 represents, helping you understand the tax and reporting position.

The FTSE 100 is one of those financial terms that almost everyone in the UK recognises, even if they are not actively investing. It is mentioned daily on the news, quoted as a measure of how the market is performing, and often used as shorthand for the health of the UK economy. From experience I find that many people know what the FTSE 100 is called, but far fewer understand what it actually represents or how it affects them in real life.

In my opinion the FTSE 100 is often misunderstood. Some people believe it is a list of the biggest British companies. Others think it reflects how well the UK economy is doing. Some assume that if the FTSE 100 is up, everyone must be better off. The reality is more nuanced than that, and understanding those nuances can help you make better decisions about investing, pensions, and long term financial planning.

In this article I will explain what the FTSE 100 is, how it works, how companies get into it, how it is calculated, and what it does and does not tell you. I will also share insight from experience about how ordinary investors interact with the FTSE 100, whether directly or indirectly, often without realising it.

What the FTSE 100 Actually Is

The FTSE 100 is a stock market index. In simple terms an index is a way of measuring the performance of a group of companies rather than looking at individual shares one by one.

The FTSE 100 tracks the 100 largest companies listed on the London Stock Exchange, based on their market capitalisation.

Market capitalisation is calculated by multiplying a company’s share price by the number of shares in issue. This means the FTSE 100 is not based on turnover, profit, or number of employees. It is based purely on the market value placed on those companies by investors.

From experience this distinction matters because it explains why some companies people think of as household names are not always in the FTSE 100, while others that feel less visible are.

What FTSE Stands For

FTSE is short for Financial Times Stock Exchange.

The index was originally created in the 1980s as a joint venture between the Financial Times and the London Stock Exchange. Over time it has become the most widely quoted UK stock market index.

In my opinion the name itself adds to the confusion. People sometimes assume the FTSE 100 is owned or controlled by the Financial Times. In reality it is simply part of a broader index family used as a benchmark.

How Companies Get Into the FTSE 100

Companies do not stay in the FTSE 100 permanently. Membership changes over time depending on how companies grow or shrink in value.

The FTSE 100 is reviewed every quarter. At each review:

Companies are ranked by market capitalisation

The largest companies qualify for inclusion

Smaller companies may drop out

New companies may enter

From experience this process is surprisingly mechanical. There is no judgement about whether a company is well run or ethical. It is simply about size and eligibility.

This means that companies can move in and out of the index fairly regularly, especially those near the bottom of the rankings.

Why Some Famous Companies Are Not in the FTSE 100

A common question I hear is why certain well known brands are not in the FTSE 100.

From experience this usually comes down to one of three reasons:

The company is not listed on the London Stock Exchange

The company is listed but not large enough by market value

The company has been taken private or merged

In my opinion this highlights an important point. The FTSE 100 reflects listed market value, not cultural importance or economic contribution.

How the FTSE 100 Is Calculated

The FTSE 100 is a weighted index. This means that larger companies have a bigger influence on the index’s movements than smaller ones.

In practice this means:

A large company rising or falling can move the index significantly

Smaller companies have less impact even if their shares move sharply

The index is calculated using a free float adjustment. This means only shares that are available to the public are counted. Shares held by governments, founders, or strategic investors may be excluded.

From experience this explains why changes in a handful of very large companies often dominate headlines about the FTSE 100.

What the FTSE 100 Measures and What It Does Not

In my opinion one of the most important things to understand is what the FTSE 100 does not measure.

The FTSE 100 does not directly measure:

The health of the UK economy

The fortunes of small businesses

Employment levels

Household income

Instead it measures the share price performance of large listed companies.

This matters because many FTSE 100 companies earn a significant portion of their revenue overseas. When the pound weakens, their overseas earnings can look more valuable in sterling terms, which can push the FTSE 100 up even if the UK economy is struggling.

From experience this is why the FTSE 100 can sometimes rise during periods of domestic economic uncertainty.

The Difference Between the FTSE 100 and Other FTSE Indices

The FTSE 100 is only one part of a wider family of indices.

Other commonly referenced indices include:

The FTSE 250 which tracks mid sized UK companies

The FTSE All Share which covers most UK listed companies

The FTSE SmallCap index

From experience the FTSE 250 is often seen as more closely linked to the UK domestic economy because its companies tend to have more UK focused operations.

In my opinion understanding this distinction helps avoid overinterpreting FTSE 100 movements as a signal about everyday economic conditions.

How Ordinary People Are Exposed to the FTSE 100

Many people assume they have no connection to the FTSE 100 because they do not buy shares directly.

From experience this is rarely true.

You may be exposed to the FTSE 100 through:

Workplace pensions

Personal pensions

ISAs

Investment funds

Life insurance investment components

In many default pension funds a portion of the money is invested in UK equities, including FTSE 100 companies.

In my opinion this indirect exposure is one of the reasons understanding the FTSE 100 matters even if you never plan to pick individual shares.

Investing Directly in the FTSE 100

You cannot buy the FTSE 100 itself. It is an index, not an investment product.

However you can invest in funds that track the FTSE 100.

These are often called index funds or tracker funds.

From experience these funds aim to replicate the performance of the index by holding shares in the same companies in similar proportions.

In my opinion FTSE 100 tracker funds appeal to investors who want low cost exposure to large UK companies without trying to beat the market.

Advantages of FTSE 100 Investing

From experience some of the perceived advantages include:

Exposure to established companies

Dividend income

Relatively low costs via tracker funds

Simplicity and transparency

Many FTSE 100 companies pay regular dividends, which can make the index attractive for income focused investors.

Limitations and Risks of the FTSE 100

There are also clear limitations.

From experience these include:

Heavy concentration in certain sectors

Limited exposure to high growth companies

Sensitivity to global factors rather than UK growth

Currency effects influencing returns

In my opinion the FTSE 100 should rarely be the only equity exposure in a well diversified portfolio.

Dividends and the FTSE 100

One of the defining features of the FTSE 100 is its dividend yield.

Many companies in the index are mature businesses that return profits to shareholders through dividends.

From experience this is why income investors often focus on the FTSE 100 rather than smaller growth focused indices.

However dividends are not guaranteed. They can be cut or suspended during difficult periods.

In my opinion relying solely on dividends without understanding the underlying business risks is unwise.

The FTSE 100 and Inflation

Another question I am often asked is how the FTSE 100 performs during inflation.

From experience large companies with global pricing power can sometimes pass on higher costs, which may protect profits to some extent.

However inflation can also:

Increase costs

Reduce consumer spending

Pressure margins

In my opinion equities including the FTSE 100 can offer some long term inflation protection, but short term performance can be volatile.

The FTSE 100 During Crises

The FTSE 100 has experienced many major events including financial crises, political upheaval, and global shocks.

From experience it is important to remember that:

The index can fall sharply

It can also recover over time

Short term movements are unpredictable

Looking at long term charts often provides perspective. Markets move in cycles and panic selling has historically been damaging for long term investors.

Common Misunderstandings I See

Over the years I have noticed several recurring misunderstandings:

Thinking the FTSE 100 equals the UK economy

Assuming it only includes British businesses

Believing it always goes up over time

Confusing price movements with personal financial wellbeing

In my opinion these misunderstandings can lead to poor decisions or unnecessary worry.

How I Think About the FTSE 100 From Experience

From experience I see the FTSE 100 as a useful benchmark rather than a complete solution.

It tells us:

How large listed UK companies are performing in aggregate

How global factors are influencing UK listed markets

How investor sentiment is shifting

It does not tell us everything and it should not be used in isolation.

The FTSE 100 and Long Term Planning

For long term savers and pension holders the FTSE 100 is one piece of a much bigger picture.

From experience most people benefit from:

Diversification across regions

Exposure to different company sizes

A balance between growth and income

Regular reviews rather than reactive changes

In my opinion focusing too narrowly on any single index can distract from these fundamentals.

Should You Care About the FTSE 100

In my opinion the answer is yes, but with perspective.

You should care enough to understand:

What it represents

How it affects your investments

Why it moves the way it does

You should not care so much that daily movements cause stress or drive impulsive decisions.

From experience the people who do best over time are those who understand the basics, stay invested appropriately, and avoid emotional reactions to headlines.

Key Takeaways

So what is the FTSE 100. At its core it is a snapshot of the UK’s largest listed companies, weighted by market value and influenced heavily by global forces.

In my opinion it is neither a perfect reflection of the UK economy nor something to ignore entirely. It is a tool, a benchmark, and a reference point.

From experience the most important thing is not whether the FTSE 100 is up or down today, but how well your investments align with your goals, your time horizon, and your tolerance for risk.

If there is one message I would leave you with it is this. The FTSE 100 is useful when understood, misleading when oversimplified, and most powerful when viewed as part of a wider long term financial strategy rather than a daily scorecard of success or failure.

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