How to Invest in FTSE 100
The FTSE 100 is a stock index which tracks the performance of the 100 largest companies by market capitalisation listed on the London Stock Exchange (LSE).
In this article, we explore the prospect of investing in the FTSE 100. We will explain the intricacies of the UK’s premier stock index, look at the top FTSE 100 companies, demonstrate step by step how to invest in the FTSE 100, and much more!
Table of Contents
The FTSE 100 Explained
The FTSE 100 was launched in 1984 and is composed of the 100 largest companies listed in London.
It is a market capitalisation weighted stock index, meaning that each constituent company is assigned a weighting based on their market capitalisation. This means that companies with a larger market cap will have a higher weighting in the calculations and, consequently, a greater influence on the performance of the overall index. The opposite is true for smaller constituents within the index.
Therefore, those considering investing in the FTSE 100 might want to pay particular attention to the index’s largest components, as these companies can play a big part in dictating the direction of the overall index. Fortunately, with the FTSE 100, these top companies also provide a fairly accurate snapshot of the makeup of the wider index. Let’s take a closer look.
Top 10 FTSE 100 Companies
The table below shows the top 10 FTSE 100 companies by their respective weightings at the time of writing.
Source: FTSE Russell – Data as of 30 June 2023
Between them, these 10 companies account for almost 50% of the entire FTSE 100 index. This means that the performance of these 10 companies has as much influence over the index as the remaining 90 companies combined.
These companies are also fairly indicative of the general makeup of the overall index. Unlike some of the main indices on Wall Street which are dominated by big tech, the top FTSE 100 constituents are made up of old economy companies, many of which operate in defensive industries.
We will look at the implications of this in a bit more detail later when we analyse the question of ‘should I invest in the FTSE 100?’. But first, let’s look at the performance of the index and how investing in the FTSE 100 has panned out for investors in recent years.
FTSE 100 Historical Performance
As many stock market indices plunged in 2022, the FTSE 100 was one of the few major indices to move in the other direction, with the index’s price rising almost 1%. This gain is largely reflective of the composition of the index and its concentration of businesses which operate in defensive industries.
During times of uncertainty, such as 2022, investors tend to rotate into stocks which generate reliable revenue, something which the FTSE 100 has in abundance. Hence the positive year in 2022.
However, as the global outlook has improved in 2023, the prospects of the FTSE 100 have moved in the other direction, with the index’s price having fallen 2.6% year to date at the time of writing.
With the exception of 2022, the FTSE 100 has been guilty of underperforming in recent years, particularly when compared to major stock indices in the US. In the ten years leading to 31 July 2023, the FTSE 100’s price rose 16.29%. However, this does not tell the whole story.
Many components within the FTSE 100 are known for their reliable dividend distributions, with the index itself having a yield of around 3.90% at the time of writing. When you adjust the returns of the index to account for its dividend payments, the returns look quite different, as shown in the table below.
Data as of 31 July 2023.
As we can see, when dividends are accounted for, investing in the FTSE 100 has been significantly more rewarding than the price would otherwise indicate. On a separate point, this also illustrates how potentially worthwhile it can be for investors to reinvest dividends over time.
FTSE 100 vs S&P 500 Performance
As the flagship UK stock index, the FTSE 100 inevitably draws comparisons with flagship indices from around the world, particularly on the other side of the Atlantic.
In the US, the Dow Jones, S&P 500 and Nasdaq Composite are the three most widely followed stock indices, but it’s the S&P 500 which is typically used as a benchmark for the US stock market. So, how does the FTSE 100 stack up? The table below shows the total returns of the FTSE 100 vs S&P 500 in recent years.
Data as of 31 July 2023.
Although in the shorter term the difference in performance between the two indices may not seem too drastic, it’s over the longer term that the S&P 500’s superiority shows itself.
Since the financial crisis in 2008, the S&P 500 has not only recovered, but has absolutely thrived. On the other hand, although the FTSE 100 has recovered, its growth has been far more muted in the intervening period.
In fact, at the time of writing, the FTSE 100’s price is just 7.80% above its 2007 high. The S&P 500? A whopping 181.11% above its 2007 high. Of course, this doesn’t account for dividends, but it demonstrates the remarkable capital growth of large-cap US companies since the financial crisis and the comparably meagre growth of UK blue chip companies in the same time period.
Should I Invest in the FTSE 100?
Whether or not an investment is suitable for you really comes down to your personal circumstances, your investment profile and what exactly you are looking to achieve from investing.
Investors should try not to get too bogged down by past performance, because, as the disclaimers always tell us, it is not necessarily indicative of future results. However, looking beyond historical performance, the make-up of the FTSE 100 brings its recent performance into perspective, and can even allow us to make assumptions about the future.
We saw earlier the top ten FTSE 100 constituents and noted how these companies were fairly reflective of the wider index.
Pharmaceuticals, oil and gas majors, banks, consumer staples, miners - these are companies which could not exactly be described as exciting or as high growth prospects. Nevertheless, these blue-chip companies produce goods and/or services which tend to benefit from fairly consistent demand.
Not only does this make these companies more attractive in times of uncertainty, as evidenced in 2022, but it also means that many companies in the index should, in theory, produce stable earnings. In many cases, this is reflected by companies rewarding their shareholders through reliable dividend distributions. And therein lies the appeal of the FTSE 100 to many investors.
Income Potential
The FTSE 100 has a reputation of being home to many companies which pay reliable and generous dividends. At the time of writing, the S&P 500’s dividend yield is around 1.50%, less than half the FTSE 100’s 3.90%.
We already noted the impact reinvesting these dividends can have on total returns but, for income investors, the FTSE 100 may be an option for generating regular income whilst potentially benefitting from capital growth. Although it should be noted that companies can, and sometimes do, drastically reduce or completely halt dividend payments if circumstances require it.
So how can you invest in the FTSE 100? Although if individual stocks are more your thing, you might want to check out our article about FTSE 100 dividend stocks.
How to Invest in the FTSE 100
Although it is not possible to invest in the FTSE 100 directly, it is possible to invest in mutual funds or Exchange-Traded Funds (ETFs) which are designed to track the FTSE 100. These type of funds can track the FTSE 100 by buying shares in all the companies in the index and consequently mirror its overall performance.
At Admiral Markets, we offer our clients the opportunity to invest in a number of FTSE 100 ETFs. In order to find out how to invest in the FTSE 100, follow these four steps:
- Open an Invest.MT5 account with Admiral Markets and log in to the Dashboard
- Find your account details and click ‘Invest’ to open the MetaTrader Web Terminal
- Search for a FTSE 100 ETF and open the price chart
- Enter the number of shares and hit ‘Buy’ to invest in the FTSE 100!
FTSE 100 Investing with Admiral Markets
As well as investing in FTSE 100 ETFs, with an Invest.MT5 account from Admiral Markets, you can buy shares in more than 4,500 companies and over 200 ETFs. Click the banner below to register for an account today:
Investing in FTSE 100 FAQ
What Time Does the FTSE 100 Close?
The FTSE 100 is constantly updated during the trading hours of the London Stock Exchange, opening at 08:00 and closing at 16:30. However, it is possible to trade the FTSE 100 24 hours a day, 5 days a week using Contracts for Difference (CFDs).
What Is the Highest the FTSE 100 Has Been?
At the time of writing, the FTSE 100's highest closing price was 8,014.31 on 20 February 2023.
When Is the Next FTSE 100 Reshuffle?
The FTSE 100 is reviewed on a quarterly basis in March, June, September and December. The reviews are based on data taken at the close of business on the Tuesday before the first Friday of the review month.
How Far Did the FTSE 100 Fall in 2008?
The FTSE 100 dropped by more than 31% in 2008, the biggest annual fall in the index’s history.
About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
