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Commercial awareness

Equity indices

What the FTSE 100 measures, how weighting works and why it isn't the economy

3 min read

An equity index tracks the value of a group of shares, so one number can sum up how a market is doing. Investors use indices to judge performance, and index funds simply buy every share in one.

The UK indices

  • FTSE 100: the 100 largest eligible companies listed on the London Stock Exchange's Main Market, reviewed every quarter
  • FTSE 250: the next 250 companies by size, which tend to earn more of their revenue in the UK
  • FTSE All-Share: most of the UK market, including the FTSE 100, FTSE 250 and smaller companies

You'll also hear about the S&P 500 in the US, the Euro Stoxx 50 for the eurozone, the Nikkei 225 in Japan and the MSCI World, which covers large and mid-sized companies across developed markets.

How weighting works

Most major indices, including the FTSE 100, are weighted by market value, adjusted for the shares actually available to investors. The bigger the company, the more its share price moves the index. A few older indices, such as the Nikkei 225, are weighted by share price instead.

Worked example: one big company moves the index

An index holds three companies worth £60bn, £30bn and £10bn, so £100bn in total. The largest rises 5% and the others don't move.

Weight of the largest = £60bn ÷ £100bn = 60%

Index change = 60% × 5% = 3%

Price and total return

The level you see quoted is usually a price index, which ignores dividends. A total return index assumes dividends are reinvested. For a market like the UK, where many large companies pay generous dividends, the difference over several years is large, so check which one a chart shows.

Why the FTSE 100 isn't the UK economy

  • Many FTSE 100 companies earn most of their revenue overseas, so the index can rise when the UK economy is weak
  • A weaker pound can lift the index, because overseas profits are worth more in pounds
  • Its biggest sectors include banks, energy, mining, pharmaceuticals and consumer goods, with few large technology companies
  • The FTSE 250 is a better guide to UK-focused businesses

That sector mix is one reason the UK market has often traded at lower price-to-earnings ratios than the US, where fast-growing technology companies make up a much larger share. A lower valuation can make UK companies attractive to overseas buyers and private equity firms.

What moves an index

  • Company results and profit forecasts, especially for the largest members
  • Interest rates, because higher rates make future profits worth less today
  • Commodity prices, which matter a lot for energy and mining companies
  • Currency moves and global risk appetite

How to talk about it

Don't just say the market went up. Say which index, roughly how much, and which sectors or companies drove it, then connect it to a cause such as an interest rate expectation or a commodity price. Mentioning the gap between the FTSE 100 and the FTSE 250 shows you know what each one represents.