Informally called the “Footsie”, the Financial Times Stock Exchange FTSE 100 Index is a market capitalization weighted index that represents the 100 blue chip companies on the London Stock Exchange. Over 80 percent of the overall capitalization in the United Kingdom is said to be mapped in this index.
The stocks in the index are free float weighted to make sure that only the investable opportunity set is included within the index. The index is managed by the FTSE group along with Financial Times and the London Stock Exchange.
The Workings of the FTSE 100 index
Obviously enough, the index must reflect the 100 companies that are currently on the London Stock Exchange or else we would still have older companies in it. The changes occur once every quarter but in the event that a company in the FTSE is to experience a takeover or a merger it will be changed accordingly.
The review process of the index is fairly simple – all companies listed on the London Stock Exchange and eligible for the FTSE UK indices are rated according to their size or market capitalization.
A committee comprised of individual market experts have a meeting in the months of March, June, September and December to decide which companies should be allowed in the FTSE 100 index. Simply put, if a company is in the FTSE 250 and manages to get into the top 90 companies then it can enter the FTSE 100 index. However, if an FTSE 100 company falls to the 111th position or below the rankings it will go too the FTSE 250.
Calculations and Weighting
They include the overall market capitalization of the companies weighted by their influence on the index. That means the larger stocks make more of a difference in the index than a smaller company. This is alternatively called the float method. This is the basic formula:
• Index level= Σ(Price of stock* Number of shares)*Free float adjustment factor/ Index Divisor
The Free float adjustment factor shows the percentage of all issued shares that are available for trading. Then the factor is rounded up to the nearest multiple of 5 percent. To find the free-float capitalization of a company, find the market cap first then multiply its free-float factor. The free-float method, as a result, does not have restricted stocks like the stocks held by company insiders.