The $TSE 100ex was introduced to the London market on the 3rd January 1984, with an initial starting value of 1000, since when the structure and original constituents have virtually changed beyond recognition, with only 21 of the original 100 companies, now still listed in the $ndexe ftse 100 index itself is calculated using two basic arithmetic principles, with one over arching geographic principle. Firstly, and most importantly, only UK domiciled blue chip companies are eligible for inclusion in the index, which implies that the index is a representation of UK plc – this is certainly not the case as we shall see shortly, and is in fact far from the truth! Secondly, all companies listed in the index are included based on their market capitalisation, ( provided they pass screening approval for both size and liquidity), and finally all constituents are then weighted in order to provide a balanced index. As a small footnote, all companies listed must by law be a ‘plc’ listed company, although in the past there have been exceptions for various historical reasons.

The ftse 100 index trades each business day in London between 08.00 am and 16.29, at which point the closing auction starts, with closing values taken at 16.35, and is refreshed and recalculated every 15 seconds during these trading times.

The index itself is maintained by the FTSE group, an independent company which started life as a joint venture between the Financial Times newspaper and the London Stock Exchange, and is now universally recognised as “The Index Company”. The group is responsible for, and also maintains, a wide range of indices of which the largest fall under the FTSE All Share Index, which includes the ftse 100, ftse 250, ftse sector350, the ftse small cap index, along with several specialists indices such as those broken down by sector and dividend. All these indices are managed according to a strict set of rules, all of which are overseen by an independent committee of market professionals to ensure that the rules are correctly applied to each index and market participant.

In terms of market size, the ftse 100 is by far the biggest, with the index today representing approximately 86% of the UK’s market capitalisation of listed LSE companies. In other words, the thousands of other companies listed on the London Stock Exchange constitute only a paltry 14% by comparison – a truly staggering figure, which I hope puts into context the size of those listed in the ftse 100. So does this mean that the index is a good barometer of the UK economy? – the answer is an empathic no, and here’s the reason why. Despite the fact that the index requires listed companies to be UK domiciled, this does not mean that they earn their revenues from UK markets and in UK sterling. Indeed, quite the reverse is true with a significant number of international shares now routinely listed, with many of these now reporting their revenues in US dollars, and this applies to most of the top ten currently listed. Furthermore in 2008, independent research suggested that approximately 65% of revenues for the ftse 100 companies was derived outside the UK market. With the top ten companies currently listed in order as BP ( no 1) HSBC Holding, Vodafone Group, Royal Dutch Shell A, GlaxoSmithKline, Rio Tinto, BHP Billiton, Royal Dutch Shell B, British American Tobacco and finally Barclays, the largest company that could be described as true UK company would be Tesco plc, currently listed at 12th in the index. More interestingly still is the fact that of the top ten, two are mining companies of truly vast size, with operations throughout the world, and adding their considerable bulk to the other 9 mining stocks in the ftse 100.The last time I looked, mining in the UK was an industry in decline and a fraction of its former size following the virtual closure of our coal mining industry during the bitter disputes of the 1980’s. Staying with the natural commodity theme for a moment, consider the market capitalisation of BP at at number one in the index, which currently stands at £117,465 million, giving this one company a weighting in the index of 8.1%. When combined with Royal Dutch Shell, these two companies alone combine to represent over 16% of the weighted index – again a truly staggering figure.

If we then consider that oil and gas companies represent almost 35% of those in the index, then perhaps you can begin to see why the ftse 100 is anything but a UK index. Indeed one could easily make the case that this is an international index, more aligned to the middle east oil rich states, and the commodity currencies of Australia and Canada, with little whatsoever to do with the UK economy or market. Whilst UK fundamental news may have an effect in the index and drive it one way or the other, of equal importance will be latest commodity prices including oil, precious metals such as gold and platinum and industrial metals such as silver, which is why it is crucial that to be successful in $tse bettingu need to follow these markets just as keenly as the ftse index itself on a daily basis.

So having seen how the FTSE 100 is far removed from simply being an indicator of the UK economy or UK shares, lets look now at how the index is constructed, managed and maintained on a regular basis, in what is in fact an ever changing environment for those of us betting on the ftse.