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The FTSE 100 – what is it and what are the risks?Following my recent article where I looked at the turmoil in stock markets, I thought I would take a closer look at the FTSE 100, the stock market index which represents the 100 largest companies by market capitalisation listed on the London Stock Exchange. The index comprises around 80% of market capitalisation of companies listed on the stock exchange.
The FTSE 100 started on 3 January 1984, replacing the FT30, and is seen as a good reflection of market activity in domestic as well as global economies, given the international base of companies within the index. Of the original 100 companies listed in the FTSE 100, only approximately 20% remain. The index set off with a market capitalisation value of around £100 billion and is now valued in the region of £1.5 trillion.
The FTSE takes its name from its two owners; the Financial Times and the London Stock Exchange, hence the name FT-SE. It is re-valued every 15 seconds, providing traders and investors with real-time valuations.
A review of the FTSE 100 is performed every three months and in general the bottom two to three companies measured by market capitalisation are ‘relegated’ and replaced by companies with a higher market capitalisation value, much like the football Premier League. It is not uncommon for those relegated to re-enter the index some time after.
In 1984, a company would need a market value in the region of £100 million to gain entry in the FTSE 100 index. This has now increased to around £2.5 billion.
At its lowest point the FTSE 100 index was valued at just 978 (on 12 July 1984) and it peaked at the end of December 1999 at 6,930, largely driven by the technology boom. A subsequent bursting of that technology bubble, the recession and the credit crisis now sees the index standing at around 5,000.
The index’s largest one day fall was just over 12% on 20 October 1987, following Black Monday. The following day the market rebounded by nearly 8%.
The FTSE 100, when originally set up, was reflective of a broad base of economic activity, but it is now dominated by around 10 companies, which account for almost 60% of all of the index’s activity. An index once dominated by the financial services sector is now more heavily influenced by the oil, gas and mining sectors - a reflection of the recent financial crisis and increase in world commodity prices. It is perhaps becoming ever more volatile.
Given this increase in volatility it may be time to review your investments, especially if you have significant exposure to sectors such as the FTSE 100, either through individual share portfolios, or indeed, via tracker funds, which mirror the underlying performance of the index. Or it may be the right time to review your investments as whole?
Armstrong Watson has been providing bespoke investment solutions and independent financial advice for many years.
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