Trading Tips for the FTSE 100
What Is the FTSE 100?
The FTSE 100 is an index of the largest companies listed on the London Stock Exchange (LSE) with the highest market capitalization. It stands for the Financial Times Stock Exchange (it was once half-owned by the Financial Times and the London Stock Exchange).
The index first appeared in January 1984 and had a start value of 1,000. With various mergers, take-overs and folded companies, the list has changed completely.
Now solely owned by the LSE, the index reached its peak value in 2017 at 7,777.62 points.
The companies that feature on this index are often referred to as blue chip and are reviewed every quarter.
The FTSE 100 is used as an indication of economic health in the UK. As the index also features international companies, it can also be used to indicate a healthy global economy.
Whether they know it or not, the strength of the FTSE 100 is crucial to every person with a UK pension. Banks will likely invest part of your pension into FTSE 100 shares.
If the index crashes, you will lose whatever was invested the same way as if you had invested yourself.
What Is the Difference Between FTSE 100, FTSE 250 and FTSE 300?
The FTSE 250 is an index of the 250 companies following the FTSE 100. This list features more domestic companies rather than those established internationally.
- Aston Martin
- Balfour Beaty
- Domino’s Pizza
- Marks and Spencer
- Pets at Home
- Royal Mail
- Signature Aviation
- W. H. Smith
The FTSE 350 is a combination of both indices.
What Are FTSE 100 Companies?
The FTSE 100 index is open to any company, regardless of the industry. As such, the list features companies from:
The top 10 companies from the FTSE 100, as of March 2021, are:
- Royal Dutch Shell – Multinational oil and gas company with a market cap of £210.82 billion
- HSBC Holdings – Hong Kong established bank with a market cap of £132.80 billion
- BP – Oil and gas company based in London but operates globally with a $108.50 billion market cap
- GlaxoSmithKline – Pharmaceutical company with a London HQ and a £74.63 billion market cap
- British American Tobacco – Tobacco company with a £61.62 billion market cap
- Unilever – Consumer goods with a $108,075 million market cap
- AstraZeneca – Anglo-Swedish pharmaceutical company with a £100.8 billion market cap
- Diageo – Alcoholic beverages with £73.9 billion market cap
- Barclays – British investment and financial service with a market cap of £30.7 billion
- BHP – Global commodities company with a market cap of £84.6 billion
How Is the FTSE 100 Measured?
The FTSE 100 is measured by market capitalization (market cap), which is another phrase for the market value.
The market cap is found by multiplying the current share price by the number of issued shares, then multiplying that number by the free-float factor.
The free-float factor is the number of shares available at the time of calculation.
These companies may feature on multiple indices, but they are all separate entities when it comes to their share prices.
As such, the value of an index rises and falls when the companies it features do.
As share prices continuously fluctuate, the companies with the most significant effect on an index are those with the biggest weight.
If HSBC were to see a slight fall in share prices and Ocado, an online food delivery service, were to see a considerable rise in share prices, the fall in the HSCB market cap will have a greater impact on the index because its value (weight) is bigger. The value of the FTSE 100 would therefore fall, rather than rise.
Rises and falls are sometimes referred to as points. At the end of the trading day, the FTSE 100 may have, for example, risen 0.8 points.
In 1984 the FTSE 100 opened on 1,000 points. Today it is valued at around 7,500 points, meaning that some companies have grown almost seven and a half times.
What Moves the FTSE 100 Market Price?
Share prices are always rising and falling because they are affected by many factors:
UK earnings. If the companies on the FTSE 100 all report good earnings, then the index value will increase. If they do poorly, the index falls. However, whilst the weight of the company does make a difference to the index value, the FTSE 100 is particularly vulnerable to the performance of British banks.
EU politics. Despite leaving the EU, the UK is still susceptible to events happening in Europe. As trade discussions are ongoing and companies are getting used to new policies following Brexit, stock prices will be significantly impacted.
Economic news. News releases such as interest rate decisions, UK GDP reports, manufacturing, housing, employment and inflation data all play a role in the value of a market share.
Global political and economic events. As many of the FTSE 100 companies trade in other markets, their share prices are affected when something happens in the countries of those markets. This could be anything from an election to a natural disaster.
Commodity prices. There are several heavyweight oil, gas and mining companies on the FTSE 100. Data shows that those companies related to commodities are affected more by what happens in the Middle East than in the UK.
Consumer behaviour. How much the public is spending and how well retailers are performing. The more people spend, the higher the share prices.
7 Trading Tips for FTSE 100
1. Decide if You Want to Trade or Invest
Trading or investing depends on your financial goals, risk tolerance and personal preference.
Spread betting is a technique to speculate if a market will go up (long) or down (short). You set a time limit on your investment and cash out when that time has expired.
CFDs allow you to participate in the index without owning the physical stock. It simply matches the value of a stock.
Investing means you either buy the stock outright or purchase an ETF (exchange-traded fund), which is a collection of securities featured on the FTSE 100.
The advantages of trading are:
- You have direct access to price movements
- You do not have to burden of physical ownership
- It only requires a small deposit
- You do not pay tax on spread bets
The advantages of investing are:
- You might also receive dividend payments
- You could make a profit
- It is part of your long-term strategy
The disadvantage of investing is that you need to have the entire fee available at the time of purchase.
2. Decide What Type of Trader You Want to Be
The four different trading styles detail how often you make a trade and how long you keep it.
- Scalping – Making a profit off of small price changes and fast resells. This is a short-term technique whereby you make many, frequent trades.
- Position trading – A long-term strategy where you keep your trades for months or even years.
- Day trading – A short-term strategy where you buy and sell a security in one trading day.
- Swing trading – A medium-term strategy where you keep a stock for a few days to a few months. You profit from predicting the price move.
3. Create a Trading Plan
Ask yourself the following quesitons:
- Are you going to trade or invest or do both?
- Will you stick to one type of trading or explore all four styles?
- What techniques will you use?
- How do your finances look? What can you invest, and importantly, what can you afford to lose?
- How much time are you dedicating to learning about trading, watching/studying the markets and making trades or investments?
Create a trading plan just as you would a study schedule. Detail every aspect, so you know exactly what you are doing.
Even if you plan on trading casually, it is still your money you are risking.
4. Have a Solid Risk Management Plan
Ensure you take advantage of all the risk management tools available.
You should also be fully aware of where all your money is going. Are there any hidden fees? What happens if your trade does not work out?
Before making any trade or investment, calculate the reward and risk ratio. The best ratio is 2:1. Never make a move on anything less than 1:1.
5. Study All the Charts
You should also consider the FTSE intraday timeframe chart, which both professionals and beginners use.
The chart allows you to place resistance and support lines so you can see any patterns that support your strategy.
6. Use Technical Analysis to Find Signals and Indicators
Your indicators confirm if these signals are legitimate. They include:
- Various averages such as the moving average to find the direction a market is moving, EMAs to determine the legitimacy of a move and MACDs, which see changes in two moving averages.
- Stochastic oscillator which compares the closing price of a stock over time to identify its trends and strengths.
- Fibonacci retracement which finds the moment a market will change its trend.
- Relative strength index to find warning triggers for dangerous price movements.
- Standard deviation which helps measure the size of price moves.
7. Set Trading Alerts and Keep Updated
Configure your trading platform so you receive market alerts directly relating to FTSE companies.
You can also set alerts related to specific criteria, so you will only be alerted once all the requirements have been met.
Keeping up to date with economic events and the daily news releases from FTSE companies will help you understand the market better and prepare you for any market changes.
Regardless of the style, type or index, trading and investing follows the same rules:
Do your homework – Make sure you know exactly how and what you are trading. Become familiar with all the tools, indicators and charts you have available to you.
Manage your risk – A lot of risk management comes from knowing what you are doing. But having an awareness of your money and taking advantage of risk management tools will help prevent any unnecessary (and costly) mistakes.
Be aware of the world – What is happening in economies on the other side of the world? Are there any political movements that may threaten a trade agreement? How are the companies on an index performing across the globe? Keep up to date with the news from around the world to prevent you from getting caught out.
Trust your instincts – If something seems too good to be true or you are having doubts, do not go ahead with the trade.
WikiJob does not provide tax, investment or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.