What is the FTSE 100? Share price index explained, what it shows us, how it differs from FTSE 250

For much of 2023 so far, countries around the world have been facing major questions about the state of their economies.

Here in the UK, we have arguably faced greater turmoil than most in the western world. Our inflation rate is an outlier among the G7 nations, while the combination of Covid, the cost of living crisis and Liz Truss’s short-lived premiership has left us with a struggling economy that is expected to only narrowly avoid a recession this year.

These problems have led to greater scrutiny of the measures we use to assess the health of the country’s finances. The Consumer Prices Index (CPI) and exchange rate of the pound have become two key indicators of what’s going on.

Another yardstick that we tended to hear a lot about anyway, even before the cost of living crisis began, is the FTSE 100. The Financial Times Stock Exchange’s list of share prices for key firms operating in the UK gives us a minute-by-minute insight into how the markets view everything from political decisions to global disasters.

But what exactly is the FTSE - and what does it mean for the UK? Here’s what you need to know.

What is the FTSE 100?

The FTSE 100 is an index of the 100 largest companies that have a listing on the London Stock Exchange (LSE). Along with Standard and Poor's 500 (also known as the S&P 500) in the US, it is one of the most used indexes in the world.

Its initial form came into being in 1962, when the Financial Times set up an ‘All-Share Index’. The list of UK share prices soon became used as a standard benchmark for the health of the stock market. Brokers, traders and investors all turned to it to gauge how they should operate in that day’s market.

The FTSE 100 itself was born in 1984 to show what was happening to the largest companies’ (also known as ‘blue chip’ firms) share prices in near-real time. It came in as new rapid share trading technology meant people wanted to have a more focused measurement of the general mood of the stock market. It is now one of the best ways of tracking the performance of the global economy during its working hours - 8am to 4.30pm - and basically means you can get a general idea of how your investments are performing.

It converts the share price and other stocks to do with these companies into points, which are weighted so that the firms deemed to be the most valuable by the markets can have the biggest impact on that day’s index. For context, it started out in 1984 at 1,000 points and is said to be up or down depending on the previous day’s final points tally.

You can also track the performances of the world’s leading companies, with the FTSE 100 showing how much they are valued at, what their share prices are, and the percentage they have gone up or down by. Currently, the top five largest companies listed on it are:

• Astrazeneca
• Shell
• HSBC
• Unilever
• BP

The top 100 companies are reviewed every quarter, with weightings changed as firms rise and fall on the list. Those towards the bottom end can yo-yo between the FTSE 100 and FTSE 250.

Having initially been set up as a partnership between the Financial Times and the London Stock Exchange (LSE), the index is now run by FTSE Russell - a subsidiary company of the LSE. As well as the FTSE 100, it runs multiple other indexes covering different types of stocks, assets and other financial vehicles.

While the FTSE 100 is the index you hear the most about, the FTSE 250 (which contains the companies ranked 101st to 250th) is a better indicator of how the UK economy is performing. This is because the FTSE 100 tends to contain companies which trade internationally, where the FTSE 250 holds more UK-based firms.

What does FTSE 100 mean?

The FTSE 100 allows us to gauge how the markets view particular events, as well as how healthy the global economy is.

If you look at its performance on a graph, you can clearly see how it has reacted to momentous domestic and global events. There were major dips during the 2008 financial crisis and when Covid-19 began to hit in early 2020. The FTSE 100 fell from more than 7,400 points to under 5,200 in under a month between February and March 2020. When it goes down, it’s a sign that the markets essentially do not like what was going on and have offloaded shares in multiple leading firms in a short space of time

Despite all the major economic concerns around the world, the FTSE hit an all-time high of more than 8,000 in February 2023. According to investment platform Interactive Investor, it reached this tally as many of the companies it listed had benefited from rising energy prices (namely energy firms, like BP and Centrica) and rising interest rates (which have bolstered large financial institutions’ balance sheets). The pound’s weakness against the dollar also helped, it is believed, with the pound’s value often moving in the opposite direction to the FTSE 100.

It is currently sitting below 7,800, as recent turmoil in the banking sector has served to dampen the FTSE 100’s performance. However, this is well above the lows of less than 7,350 recorded in mid-March when investors feared the woes engulfing Silicon Valley Bank and Credit Suisse would spread to the rest of the global financial system.

In contrast, the FTSE 250 has remained subdued compared to its more high profile ‘sister’ index. According to Interactive Investor, it has been outperformed because it is “much more closely correlated to the UK’s economic and political uncertainty”. It currently sits well below its September 2021 high of 24,250 at around 19,400. A low of little over 16,600 was recorded in the midst of the Liz Truss administration in October 2022.