ftse 100

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The FTSE 100, which is an index of the UK’s largest hundred companies by market cap, is one of the most popular indexes to trade in the world. It includes household names like Barclays, Astra Zeneca, Prudential and Coca Cola and is also known as just the “FTSE” or “Footsie.”

Short for Financial Times Stock Exchange, the FTSE 100 was launched as a joint venture between the Financial Times and the London Stock Exchange in 1984. It is now worth over a trillion dollars in the combined market caps of its constituent companies and is one of the most liquid markets in the world.

The index can be quite volatile which offers spread bettors opportunities to benefit from the big moves in the market which can happen quite regularly. We will take a look at some ideas and strategies for trading the FTSE below.

FTSE 100 – A Brief History

Trading on the FTSE 100 began in 1984 and the level of the market at that time was 1,000. Since then it has had many ups and downs, most notably:

  • A strong bull market in the three years after it was founded;
  • Followed by the Black Monday crash of 1987 when the index fell by over 20% in just a few days;
  • The bursting of the tech bubble in 2000 and the terror attacks of 9/11 in 2001 which led to a long bear market right up until 2003;
  • A long bull market from the lows of 2003 until the credit crunch of 2007;
  • The financial crash of 2008 when the market lost nearly half its value;
  • And of course more recently the coronavirus crisis which led to initial drops of up to 2,500 points in the market.

The FTSE 100’s high point came in May 2018 when it traded as high as 7800 at a time of market enthusiasm, whilst remaining generally above 7,000 up until the corona virus crisis struck in 2020.

Whilst the index is made up of companies based in the United Kingdom, it is worth noting that many of these companies derive a large portion of their revenues abroad. The FTSE 100 therefore doesn’t necessarily represent the health of the British economy in the same way as the S&P 500 does the US economy.

At the same time, it means that as sterling (GBP) drops in value, conversely the FTSE tends to rise as the value of goods sold abroad is higher, being in foreign currencies. This happened to a significant extent after Brexit, when despite the pound falling and there being worries about the future of the British economy, the FTSE rose to all-time highs and generally remained at high levels throughout the years of Brexit wrangling following the referendum result of 2016.

What Affects the FTSE’s Price?

As the FTSE 100 is made up of the top one hundred UK companies, then big moves in the prices of these companies will move the index’s price.

However, there are a number of ways this can happen and a number of other factors that can affect the price of the FTSE. These include:-

  • General economic sentiment – much like any other index, the general economic mood will normally have an impact on the FTSE, although this tends to reflect a more international economic outlook rather than the UK’s specifically. If there is a great deal of optimism and bullishness around the economy, analysts are expecting growth and people are buying shares on the back of this positive sentiment, then the FTSE will tend to go up. Equally, if the economy begins to stutter and the mood turns bearish, people will tend to sell their shares due to fear and uncertainty, causing a market drop.
  • Worldwide events – as discussed above, big world events like the dot.com bubble, 9/11, the financial crash, Brexit and covid-19 had a direct and significant impact on the index. Equally, political events like elections can also affect the market, with clear, decisive results often boosting the market where as hung parliaments or indecisive results tend to have a negative impact.
  • Interest rates – it is worth keeping an eye on interest rates too as they can have an impact on the index. When interest rates go up it can have a negative impact on companies in the FTSE because their debts and borrowings become more expensive. Although interest rates have been at historically low levels since the 2008 financial crash, even small movements in the bank’s base rate can affect the index’s value.
  • Earnings of FTSE constituents – although you might not think the earnings of a single company would make a difference to the index, with some outsize members like Astra Zeneca (market cap £114bn at the time of writing), Unliver (£108bn) and Shell (£106bn), a particularly strong or weak earnings report can actually have an impact on the market. Moreover, a group of earnings reports from a particular sector – for example oil or pharma – together could have a significant impact on the market if they were largely either positive or negative.
  • Oil and other commodities – oil and mining stocks make up a big part of the UK’s top share index and so a significant move in the price of oil or other major commodities can also affect the Footsie’s price. For example during the covid-19 crisis as economies shut down, demand for oil plummeted and so did the value of a number of oil stocks, which account for a sizable part of the FTSE 100.

All of these factors and more can affect the movement of the FTSE, which is quite a lot to keep track of. As well as all this, general trends reflecting trader sentiment can move the market by in between these kinds of developments.

How to Spread Bet on the FTSE 100

Being a very popular index for traders, particularly in the UK, the FTSE tends to have a narrow spread of 1-2 pips during trading hours and 4-5 pips out of hours with most reputable brokers. One pip normally represents one index point with most brokers.

This makes it quite easy to work out potential profits and losses. Let’s say for example you thought the FTSE 100 was overvalued at its current level of 6210 at the time of writing.

You could put in a sell order at 6210 for £1 per pip, with a stop loss set 100 points higher at 6310 and a take profit set 100 points lower at 6110.

Example of a sell trade on the FTSE 100 at IG Index.

Then if the index were to fall to 6110, you would make £100 profit (6210 – 6110 = 100), minus any interest for holding the trade overnight.

If alternatively you were bullish about the market and thought it had further to run upwards, you could place a buy trade at 6217 at £1 per pip with a stop loss at 6117 and a take profit at 6317, as in the example below:

Example of a buy trade on the FTSE 100 at IG Index

Then if the market bounces up nicely as you had expected, you could be in for a nice profit of £100.

Of course, you don’t have to wait until your stop loss or take profit are hit – you can close the trade in between if you are happy with the level the market has reached and want to realise your profits (or cut your losses).

(Please note the two examples above are not recommendations for trades, just examples of how to execute trades)

Ideas for Trading the FTSE 100

So now you can see how to trade the FTSE 100, it’s worth looking at some possible trading angles on the index. Here are a few trading ideas:-

  • Think about the trajectory of the pound – as discussed above, there is a clear (inverse) link between the value of the pound and the FTSE 100. Those who recognised this after the Brexit referendum and bought the index on the basis that a drop in the pound would be good for many FTSE 100 companies, did very well. So thinking about where the pound is likely to go can be an effective, and often underappreciated, approach to trading the index.
  • Focusing on the “big boys” – as detailed previously, a large proportion of the index in market cap terms is based around big pharma, oil and mining stocks. So thinking about likely moves in these stocks as groups or sectors, for example when they have earnings reports coming up or big events that are likely to affect them, can be a worthwhile approach.
  • Looking at the US markets – the biggest markets in the world can influence other markets and there is no bigger stock market than the US. It can be worth paying attention therefore to movements in the S&P 500 which might signify some movements the next day in the FTSE 100. An academic paper from Lingnan University found that “The S&P 500 has a strong causation effect on the FTSE 100, both before and since the financial crisis. This link seems to have increased after the October 2007 peak in the S&P 500.” Although the paper is from 2012, it can still be worth looking at the correlation of the two indexes. Most of the time you would expect any moves in the S&P 500 to be reflected almost immediately in the FTSE 100, even in the futures markets when the FTSE market is closed, but if there isn’t then it could present a trading opportunity.
  • For longer term trades, think about overall economic health – over the longer term, stock markets tend to fall when there are recessions and depressions and to rise in periods of economic growth. Therefore if you are looking at longer term trading, it can be a good idea to try and filter out all the noise and concentrate on where you think the overall economy is heading.

So there are some trading ideas for the FTSE 100, but really there are almost countless ways you can trade the market including using technical indicators rather than the fundamental analysis listed above.

Whichever methods you use when trading the FTSE 100, it is vital to utilise careful money management and stay disciplined in your trading decisions.

Conclusion –  How to Spread Bet on the FTSE 100

The FTSE 100 is one the largest and most popular indices in the world and attracts a huge amount of trading volume. It has seen many peaks and troughs since it was established in 1984, delivering significant gains and losses for traders.

Many factors influence the FTSE 100’s price including worldwide events, news, political developments, oil prices, interest rates and more. Knowing and understanding how exactly these factors affect the movement of the index – and if you are skilled enough, anticipating them ahead of time – is key to trading the market successfully.

You may not be able to make a profit from trading the index, but you can check out our list of winning trading systems that have all passed a live trial here on the site.

 

 

The contents of this website are intended for educational and information purposes only and do not constitute any form of advice or recommendation and are not intended to be relied upon by you in making (or refraining to make) any specific investment or other decisions. Appropriate expert independent advice should be obtained before making any such decision. We cannot and do not offer individual investment advice.

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