What is FTSE 100 Index?  How Can We Choose Stocks In Terms Of Market Capitalization?

  • Oct 21, 2019 BST
  • Team Kalkine
What is FTSE 100 Index?  How Can We Choose Stocks In Terms Of Market Capitalization?

The FTSE 100 stock Index - This index is the second largest stock index of the United Kingdom after the FTSE All Share index in terms of market capitalization. Launched on 3 January in the year 1984, the FTSE 100 stock index comprises of the top 100 stocks listed on the London Stock Exchange arranged in ascending order in terms of the market capitalization, which at any point of time represents at least 80 percent of the total market capitalization of the London Stock Exchange. Some of the top name of companies donning this list are 3i Group Plc, Associated British Foods Plc, Admiral Group Plc, Anglo American Plc, Antofagasta plc, Ashtead Group Plc, AstraZeneca Plc, Auto Trader Group Plc, AVEVA Group Plc, BAE Systems Plc, Barclays Plc, Barratt Developments Plc, JD Sports Fashion Plc, Berkeley Group Holdings (The) Plc, BHP Group Plc, BP Plc, British American Tobacco Plc, British Land Co Plc, BT Group Plc and  Bunzl Plc.

The constituent companies of this index have their operations spread across 150 countries and nearly two third of their earnings come from overseas. The index is also representative of different industrial sectors, with operations of its constituents spread across at least 10 different industrial sectors, headed by consumer products and financial services.

The FTSE 100 boasts of itself for being United Kingdom’s globally recognized benchmark index. FTSE 100 component companies have donned pathbreaking new business practices, fostered global business outlook and brought economic success for the United Kingdom and for the countries where they operate.

The value of FTSE 100 stock Index is calculated on a real-time basis and is published every second from 8.00 am in London when trading starts on the London Stock Exchange till 4.30 pm in the afternoon when the trading on the exchange concludes for the day.

This headline stock index, also known as the large-cap stock index, is representative of the largest companies in the United Kingdom, in terms of revenues and market capitalization, is seen by many as the barometer of the British economy. It is studied by academicians, economists, debt market makers, stock market professionals and researchers alike to carefully consider the implications of any unwarranted movements in the general economic indicators of the British economy on the stock index and vice versa. However, this concept of being the barometer of the British economy has come to be challenged more recently as the index now houses an increasing number of multinational and foreign companies whose performance is remotely linked to the macro-economic fundamentals of the British economy. It is being argued that the said title should now go to the FTSE 250 index which has a greater proportion of Britain- domiciled companies with a healthy mix from all sectors.

It has been observed that between the British Pound Sterling  and FTSE 100 index there exists an inverse relationship. Whenever there is weakness in the British currency most of the FTSE 100 companies enjoy better fortunes on account of higher sales. A fall in the British Pound Sterling usually signals a high earning period for the exporters of that country as well as other businesses dependent on these exporters.

The FTSE 100 complies with the highest corporate governance standards with independent governance committees ensuring that rule based methodologies are followed to the letter, making sure thereby that the index serves its customers well. They also ensure that the index is constructed and maintained with transparency, objectivity and integrity.

Market Capitalization – the way to choose stocks for investment

Market capitalization is the aggregate valuation of the company based on its current share price and the total number of outstanding stocks. It is calculated by multiplying the current market price of the company's share with the total outstanding shares of the company.  Market capitalization is one of the most important characteristics that helps the investor select stocks for investment purposes. It helps the investor choose the stocks that can help meet his risk profile and return expectations.

The term is also used to get several dimensional insights into the many facets of a stock; like trading patterns, speculative interest and sensitivity to information, other than determining the value of a company. It says a lot when compared to other companies in the same market or with similar market capitalisation. Segmenting the stock market into different groups, based on the market capitalization of the stocks is one of the ways this parameter is used. Companies with the largest market capitalizations above a certain base are called as large-cap stocks, companies with mid-range market capitalizations (within two specified limits) are called as mid-cap stocks and companies with market capitalisation below a threshold are called as small-cap stocks. However, there is no set value of the parameter to demarcate what constitutes a large-cap, mid-cap or a small-cap company. It will differ in different stock exchanges based on company’s’ individual outstanding market capitalisation in the respective markets where they trade.

Categorising the market into three segments based on the value of the above parameter helps to understand the demand and supply forces at work at any point of time in the market. It reveals the behaviour of different categories of investors like mutual fund managers, high net-worth individuals and ordinary investors in terms of their preference in selection of stock and also how often they would trade in stocks of a particular category. The categorisation also helps in understanding investor movement patterns among these market segments during different periods of economic cycles.

Over the past several years, studies have been done by individuals, stock market researchers and academicians alike, to understand the different facets of insights put forward by this method of capital market segregation. The objective of these research exercises is to determine which category will be a better value creator under different market conditions. The differentiation also helps to determine what strategies may be adopted by investors with different styles of investing and objectives that they seek to accomplish.

FTSE 100 – Ideas to invest in, in this uncertain macro-economic environment

FTSE 100 listed stocks are stocks with the most investor interest. These stocks usually command the highest proportion of the total market capitalisation of a stock index. These stocks are generally the most traded and are the most liquid of all stocks traded on the London Stock Exchange. These companies do pay out good dividends, but at times it is seen that yields are unattractive on account of high prices of their stocks. Hence investors building a low-to-medium risk portfolio may invest in these stocks as this category of stocks is also the safest, with lowest amount of total risk compared to the constituents of FTSE 250 and FTSE Small Cap Indices.

For the FTSE 100 stock index, the total return for the twelve-month period to September 2019 was 3.2 per cent. The total return for the five-year period to September 2019 was 36.8 per cent.

Multinational and international companies – This Index is host to a number of international and multinational companies whose fortunes are either remotely or not entirely dependent on the economic vagaries of the British economy. Investment in such stocks may provide investors a hedge against the stock performance of United Kingdom domiciled companies, which are largely affected by the adverse macro-economic climate prevailing in the United Kingdom.

Some of such companies in the FTSE 100 List are the Vodafone Group Plc, Rio Tinto Plc, Prudential Plc, Pearson Plc, Mondi Plc, InterContinental Hotels Group Plc, Glencore Plc, GlaxoSmithKline Plc, Fresnillo Plc, Ferguson Plc, Compass Group Plc, Centrica Plc, BT Group Plc, JD Sports Fashion Plc, British American Tobacco Plc, BHP Group Plc, AstraZeneca Plc and Anglo American Plc.

 

Building a dividend portfolio – Another good way of getting a decent return from this market despite the cloudy macro-economic scenario is to build a dividend portfolio of good dividend paying stocks from the list of FTSE 100 companies. There are several companies on that list which are cash rich and would continue to pay dividends even in these conditions.  Moreover, the prices of these stock have also been trading at relative discount to their highs due to the macro economic environment. This has resulted in many of them to have dividend yields that are very attractive and worth making investments in.

 

FTSE 100 Index Funds – There are many mutual fund companies which provide FTSE 100 index funds which incorporate the above two benefits in their portfolio. Investors investing into these units will get the additional benefit of professional management in addition to diversification and high dividend yields.

With Bank of England reducing the interest rates to a historic low level, the spotlight is back on diverse investment opportunities. 

Amidst this, are you getting worried about these falling interest rates and wondering where to put your money?

Well! Team Kalkine has a solution for you. You still can earn a relatively stable income by putting money in the dividend-paying stocks.

We think it is the perfect time when you should start accumulating selective dividend stocks to beat the low-interest rates, while we provide a tailored offering in view of valuable stock opportunities and any dividend cut backs to be considered amid scenarios including a prolonged market meltdown.

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