Sammie Ellard-King
I’m Sammie, a money expert and business owner passionate about helping you take control of your wallet. My mission with Up the Gains is to create a safe space to help improve your finances, cut your costs and make you feel good while doing it.
In this article, we’re going to look into what is the FTSE and what it’s really made up of.
The FTSE All Share Index (often pronounced Footsie) is composed of the largest, roughly 640 companies of the 2,000 traded on the London Stock Exchange by market capitalisation.
Investing in this index is like buying shares in all of the publicly traded companies on the main market of the London Stock Exchange.
Table of Contents
What is the FTSE made up of?
The FTSE All-Share can be further broken down into smaller indexes. The FTSE 100 is the 100 largest companies on the British Stock exchange and contains names of companies you have heard of and are pretty familiar with.
The FTSE 250 Index are the companies that consist of the 101st to 350th companies by market capitalisation. Together, the FTSE 100 and 250 make up the FTSE 350 Index.
In addition to those 350 companies, there are roughly 300 small-cap companies that make up the rest of the FTSE All-Share Index.
If you spend time learning about the stock market, you will hear or read about the same relatively small number of stocks over and over again.Â
This is because of the over 600 stocks traded on the London Stock Exchange, the 100 largest make up roughly half of the market capitalisation of the entire exchange, and of those 100, the largest ten make up about roughly half of that market capitalisation.Â
In other words, roughly 25% of the market capitalisation of the entire London Stock Exchange is in the ten largest companies.
What type of companies are in the FTSE?
Most analysts divide the stock market up into eleven different sectors.
Each company generally fits into one of the sectors, although because many companies have such a diverse suite of products and services, it is not always possible to fit them perfectly into one sector.
Dividing the index up into sectors is useful because while the goal is to pick the best stocks, we know how difficult that can be. Often when looking at the entire economy, it can be a little easier to choose which sectors may outperform or underperform the others.
Dividing the market into sectors is also useful because it makes it very easy to diversify a portfolio.Â
Let us say you want a group of ten stocks to make up your portfolio. If you were to pick your best ten and notice that five of them are from the same sector, that would be a warning that your portfolio is probably not very well diversified.
A closer look at the sectors
Healthcare
The Healthcare sector is comprised of businesses that provide medical services, manufacture medical equipment or pharmaceuticals, provide medical insurance, or otherwise serve the healthcare needs of patients.Â
The Cambridge-based pharmaceutical company AstraZeneca is in the healthcare sector and is one of the largest and most important companies on the London Stock Exchange.Â
Materials
The Materials sector is made up of companies that work in the discovery, development and production of raw materials such as plastic, fertiliser and metals.
Real Estate
The real estate sector is made up of mostly Real Estate Investment Trusts (REITs). REITs can invest in any number of different types of real estate.Â
Many investors are unable to invest in real estate directly by buying a single property due to the high cost, but investing in REITs offers a way around that.Â
Some REITs, despite their name, invest in mortgages and are actually in the financial sector.Â
Consumer Staples
The consumer staples sector is made up of the companies that manufacture and market products such as food and non-durable household goods and personal care products.Â
These companies often do well in a recession due to the inelastic demand for their products. After all, you probably do not splurge on buying extra toothpaste when you run into a large amount of cash, nor is it the first thing you cut back on when money gets tight.Â
Unilever, one of the largest and most well stocks on the exchange, is in the consumer staples sector.Â
Consumer Discretionary
The consumer discretionary sector is made up of the companies that manufacture or sell goods or services that have an elastic demand.Â
This means they can be very sensitive to economic fluctuations. Restaurants, theme parks, apparel and luxury goods are all examples of consumer discretionary items.Â
Utilities
The utility sector is made up mostly of companies engaged in electrical power, water supply and sewage and waste removal.Â
By convention, those in the natural gas business are usually considered utilities as well, even though it may seem like they fit better in the energy sector.Â
Energy
The energy sector is made up mostly of oil and coal producers as well as those involved in renewable energy. For example you’ll find companies like Shell and BP here.
Industrials
The industrials sector is made up of the companies that manufacture and distribute capital goods, including aerospace & defence, construction, engineering & building products, electrical equipment and industrial machinery.
Communications
The communications sector is the companies that typically sell phone and Internet services.Â
Generally, the manufacturers of the actual handset we use every day are not considered in the communication sector, but the providers are, as well as media companies.Â
In this sector you’ll find businesses like BT and Vodafone.
Financials
The financial sector is made up of banks and other financial institutions. Banks, insurance companies, investment firms and some real estate companies are in the financial sector.Â
Tech
Finally, the technology sector is made up of companies using new and emerging technology. Many of both the largest and smallest companies on the exchange are in the tech sector.Â
This is because so many are founded each year as new tech is introduced and developed, and the winners in this sector can grow to enormous market caps due to our reliance on technology.Â
Top FTSE businesses you should know
The largest companies on the exchange are in the FTSE 100 Index. Of course, the market capitalisation changes daily, but one of the largest, and often the largest, company on the London Stock Exchange is the oil giant Royal Dutch Shell.
The pharmaceutical company AstraZeneca is often the second largest by market cap, followed by the multinational banking and financial services giant HSBC.
Unilever is the fourth largest company, followed by the alcoholic beverage company Diageo. As you can see, the five largest companies are in five different sectors. This demonstrates the power of using Indexes to diversify your portfolio.
Large-cap companies are often, but not always, thought to be safer and a little less prone to volatility than medium or small-sized companies.
If you are choosing your own stocks, looking at the largest companies on an index and only sticking to those can sometimes be a good rule of thumb that will help your portfolio sustain market downturns.
How is the FTSE weighted?
The mathematics behind how much each company contributes to the overall value of the index gets extremely complicated, but in the simplest terms, the FTSE indexes are capitalisation-weighted.Â
That means that the companies are weighted according to their overall market capitalisation.
Most indexes around the world are capitalisation-weighted, but one notable exception is the Dow 30, or Dow Jones Industrial Average, in the United States.Â
That index is a price-weighted index, meaning that the companies are weighted according to their share price. As we know, the share price has practically nothing to do with the overall valuation of the company, but the Dow is price-weighted for simplicity.Â
Having a price-weighted index, especially one consisting of only 30 stocks, gives investors a very simple gauge to use on a daily basis to judge the overall movement of the stock market.
Depending on how ambitious an investor wants to be, choosing only index funds to invest in such as one based on the FTSE All-Share can be a great way to simply choose a portfolio that is guaranteed to be a winner over the long term.Â
Choosing a portfolio of individual stocks that can beat a benchmark such as the FTSE 100 or S&P 500 is a lot more difficult than many people realise.Â
When you use an index, there is less volatility in your portfolio, which often prevents people from making one very common mistake, which is selling in a panic when the market turns negative.
If you are investing in the stock market, compare your portfolio to one of these benchmarks, at the very least, it may help you avoid some of these common pitfalls.
You can check out some of our top investing apps that you can invest with.
Choosing to invest in the FTSE
As an exercise or as an actual investment, you can choose your own portfolio of stocks based on the FTSE All Share Index. To start, choose which six sectors you think will outperform the other five.
We already discussed how consumer staples do well in a downturn, and consumer discretionary do better in a growing economy.
Based on what you know about the economy and current news events, see if you can figure out what the best six sectors will be. If energy prices are high, that sector may do well.
Likewise, maybe there are other sectors that you think will perform well in a shrinking economy, healthcare perhaps.
Once you have your six sectors, choose your favourite stock from each sector. Once you do this, you will have a diversified portfolio of six stocks. You can actually buy the stocks or just record the stock price and the date.
Wait several months and see how well your portfolio does against the index. Make sure you account for dividends, which will not be reflected in the stock price. See if you can beat the index, it may be tougher than you think.
Conclusion
So now you know what is the FTSE and what’s in it. One of the oldest indexes in the world with some old money businesses in it has now been shaken up some newcomers.Â
As the UK looks to invest in bringing in more tech start ups like Deliveroo and make the UK a more attractive place for exciting new business. With this change in tactic we may see a big shake up in the companies inside the FTSE 250 over the coming years.
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Disclaimer: Content on this page is for informational purposes and does not constitute financial advice. Always do your own research before making a financially related decision.
