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Know Your Index - The Origin of the FTSE 100

How the FTSE was formed and how the price is determined.

The FTSE 100 is an index comprised of the 100 largest companies on the London Stock Exchange (LSE). Traditionally viewed as a good indicator of the performance of the major companies listed in the UK, the FTSE 100 is the leading index for UK investors and citizens alike to keep an active eye on.

The Origin of the FTSE 100

Originating in 1984, the FTSE 100 is merely named after the company that calculates the index and the 100 companies the index contains. Owned by the London Stock Exchange and the Financial Times, the FTSE Group also maintains the FTSE 250, which is an index of the next 250 publicly traded UK companies with lower market capitalization.

Though it started with a value 1,000 in 1984, the value of the FTSE 100 has risen over the years to reflect the growing economic markets. The make-up of the index has also changed quite drastically over the years. A series of mergers and disappearing companies has led to only 3 of the original 100 companies currently maintaining a position on the powerful index.

What does the Index Value Mean?

price of ftse imageLike any other index, the value of the FTSE 100 fluctuates daily. Currently, the index is hovering above 6,300, which is over 600 points less than its high of nearly 7,000 in 2007. Similar to the Dow Jones Industrial Average, the FTSE tanked in early 2008, but has been experiencing a steady recovery year after year. Since the overall value of the FTSE reflects the stock value of the UK's top FTSE 100 companies, it also reflects the health of the British economy in general. This correlation has never been more evident than it was when the economy and market crashed just a few short years ago.

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FTSE 100 Leading Sectors and Businesses

The FTSE, and the British economy in general, is led by a multitude of top companies performing in a variety of sectors. However, index leaders, such as Royal Dutch Shell and British Petroleum, give significant insight into the sectors that are currently driving the UK market. Though construction firms and automobile manufacturers play a significant role, the oil, gas, and mining sectors are producing all-time high returns and continue to lead the way.

Unfortunately, one thing that is constant in business is change. As new companies continue to emerge and show significant growth, they have the opportunity to gain their spot on the FTSE 100 during each quarterly review. Savvy investors always have their eye on the FTSE and look for any opportunity to get their hands on a piece of the wealth.

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