FTSE 100 Index

The FTSE 100 Index (often called the 'Footsie') is a headline stock market index of the 100 largest and most actively traded companies listed on the London Stock Exchange (LSE), as measured by their total market capitalization. Think of it as the premier league of British business. Launched in 1984, the “Footsie” is a key barometer for the health of the UK's stock market and, to a large extent, the global economy. It's a market-capitalization-weighted index, which means that corporate giants like Shell, AstraZeneca, and HSBC have a much bigger impact on the index's movement than the smaller companies at the bottom of the list. When you hear news anchors talking about whether “the market” is up or down in London, they are almost always referring to the FTSE 100. For investors, it represents a portfolio of blue-chip, established, and often dividend-paying Goliaths of the corporate world.

A common misconception is that the FTSE 100 is a pure reflection of the UK economy. It's not. While the companies are listed in London, their business is overwhelmingly international. A staggering 75-80% of the combined revenue of FTSE 100 companies is generated outside the UK. This makes the index a proxy for global economic trends rather than a narrow measure of Britain's domestic health. For example, a slump in Asian markets could hurt banking giant HSBC, and changes in global oil prices will directly impact Shell and BP, dragging the whole index with them. If you're looking for a more UK-focused benchmark, the FTSE 250 Index, which comprises the next 250 largest companies, is a far better indicator of the domestic British economy.

The FTSE 100 is famously home to mature, stable companies that are often past their explosive growth phase. Instead of reinvesting all their profits for expansion, they tend to return a significant portion to shareholders in the form of dividends. This makes the index particularly attractive to income-focused investors. Historically, the FTSE 100's overall dividend yield (the total annual dividends of all companies in the index divided by their total market value) has been higher than that of many other major global indices, such as America's S&P 500. For a value investor, this stream of cash can be a sign of a healthy, disciplined “cash cow” business.

Getting exposure to these 100 giants is straightforward, but a savvy investor thinks carefully about how they do it. There are two main paths.

The simplest way to invest is through funds that automatically replicate the index's performance.

• Index Funds: These are mutual funds that buy shares in all 100 companies in the same proportion as the index itself. You buy into the fund, and the manager does the rest.
• Exchange-Traded Funds (ETFs): These are similar to index funds but trade on a stock exchange like an individual share. You can buy or sell them throughout the trading day.

Both options offer instant diversification and typically come with a very low expense ratio (annual fee), making them a cost-effective way to own a slice of the UK's top companies.

A dedicated value investor, in the spirit of Benjamin Graham or Warren Buffett, rarely buys the entire market haystack. Instead, they hunt for the needles. For them, the FTSE 100 is not an investment in itself, but a pre-vetted list of large, established businesses to analyze. The goal is to “cherry-pick” individual companies from the index that are trading at a significant discount to their intrinsic value. This requires more work—reading annual reports, understanding competitive advantages, and patiently waiting for a great company to be offered at a good price. While passive tracking is easy, this active approach is the true heart of value investing, aiming to beat the market, not just match it.

From a value investing standpoint, the FTSE 100 is a double-edged sword. On one hand, it’s a fantastic pool of generally stable, cash-generative, and globally significant businesses—the kind of companies that can form the bedrock of a long-term portfolio. On the other hand, buying a tracker fund means you are forced to buy every company in the index, including the fashionable and potentially overvalued ones, right alongside the unloved and possibly undervalued bargains. The true value investor uses the FTSE 100 as a starting point for research, not an end-point for investment. It’s a list of candidates to be scrutinized, not a basket of goods to be bought blindly. The key is to remember that an index is just an average; your goal should be to do better than average by selecting superior businesses at attractive prices.