One of the most common methods used to gauge the performance of the British stock market is the FTSE 100. It’s a weighted index that tracks the performance of the largest 100 companies by market capitalisation listed on the London Stock Exchange.

The term FTSE stands for Financial Times Stock Exchange. And it was created on 3 January 1984 at a starting level of 1,000 points. Today, investors and traders across the United Kingdom and even Europe actively use the FTSE 100 as either a benchmark against their investment portfolios or a passive investment opportunity through an index fund or an exchange-traded fund.

How does the FTSE 100 work?

The FTSE 100 index contains 100 large-cap stocks selected based on the underlying business’ market cap. As of December 2022, the index’s total value stood at £1.92trn. As of November 2022, the total market cap of all companies listed on the London Stock Exchange stands at just over £3.78trn. In other words, the FTSE 100 represents approximately 50.8% of the value of all British stocks.

To be included in the index, a firm must become, at least, the 100th largest publicly traded company in the United Kingdom. Because of the volatility in the stock market, the bottom ten index constituents change regularly. However, the addition or removal of a business from the FTSE 100 occurs quarterly, not daily.

It’s also important to realise the index is not equally weighted. The largest businesses within the FTSE 100 have a higher weighting than the smallest. And therefore, the share price movement of these companies has a more significant effect on the index value.

As of December 2022, the ten largest UK stocks in the FTSE 100 index include:

1. AstraZeneca (LSE:AZN)
2. Shell (LSE:SHEL)
3. Unilever (LSE:ULVR)
4. HSBC Holdings (LSE:HSBA)
5. Diageo (LSE:DGE)
6. BP (LSE:BP)
7. British American Tobacco (LSE:BATS)
8. Rio Tinto (LSE:RIO)
9. Glencore (LSE:GLEN)
10. GlaxoSmithKline (LSE:GSK)

What is the average return on the FTSE 100?

Since its starting value of 1,000 points in January 1984, the FTSE 100 has reached approximately 7,500 points as of December 2022. Therefore, over the 39 years of its existence, the index has generated a 650% return for investors. That’s the equivalent of 5.3% on an annualised basis.

However, this only encapsulates the capital gain generated. The index also generates, on average, a 3.71% dividend yield. Following the stock market correction in 2022, the FTSE 100’s yield stands at approximately 4.10%. When compounded over decades, this makes an enormous difference.

Therefore, when including the returns from dividends, the FTSE 100 has actually returned close to 1,377% to investors or 7.15% on an annualised basis.

FTSE 100 vs other indices 

The FTSE 100 isn’t the only benchmark index widely used to track the performance of the UK stock market. Others include the FTSE 250, FTSE 350, and FTSE AIM 100. But how do these compare?

FTSE 100 vs FTSE 250 

The FTSE 250 was launched on 12 October 1992. Like the FTSE 100, it’s also a market capitalisation-weighted index. And consists of the 101st to 350th largest companies listed on the London Stock Exchange.

The constituents are also added or removed every quarter. However, due to the smaller size, most companies within the FTSE 250 are either mid-cap or small-cap shares. Consequently, the index has historically been significantly more volatile than the UK’s flagship stock index.

Despite the increased index volatility, patient investors have been rewarded with superior returns versus the FTSE 100. Between October 1992 and August 2017, the FTSE 250 delivered a total return of 1,637% – or 11.8% annually.

FTSE 100 vs. FTSE 350

The FTSE 350 is a capitalisation-weighted index that contains the 350th largest companies on the London Stock Exchange. In effect, it serves as a combination of the FTSE 100 and the FTSE 250, giving investors exposure to large-cap, mid-cap, and small-cap UK stocks.

Due to the increased diversity across companies of different sizes, some professional traders believe it to be a more accurate proxy for the state of the British economy. Despite this, it remains a largely unpopular index compared to the FTSE 100.

Since July 1994, the index has delivered a total return of approximately 746% as of December 2022. That’s the equivalent of 7.9% on an annualised basis.

FTSE 100 vs FTSE AIM 100

The FTSE AIM 100 is another market cap-weighted stock index. It was launched on 16 May 2005 and contains the largest 100 stocks listed on the Alternative Investment Market (AIM). AIM is a subsection of the London Stock Exchange. And it’s home to typically tiny businesses that are too small to be listed on the main exchange.

As such, even though the index contains the most prominent companies listed on AIM, these are still small-cap stocks. And several firms venture into micro-cap and penny stock territory.

FTSE 100 index sector weightings

The FTSE 100 is also often used as a proxy for the British economy, given the diversity of its constituents’ industries.

List of all FTSE 100 companies

The bottom line

The FTSE 100 is one of the most widely followed indices in the United Kingdom by traders and investors alike.

It can provide quick and easy insight into the overall performance of the London Stock Exchange. And the larger size of its constituent companies makes it less prone to volatility. However, historically its performance has lagged behind other British and international stock market indices.

This article contains general educational information only. It does not take into account the personal financial situation of the reader. Tax treatment is dependent on individual circumstances that may change in the future, and this article does not constitute any form of tax advice. Before committing to any investment decision, an investor must consider their individual financial circumstances and reach out to an independent financial advisor if necessary.