The FTSE 100 Explained: What It Is and Why It Matters

You’ve heard it on the radio in the back of a taxi: “The FTSE 100 closed up forty points today.” It sounds like grown-up news for people in suits — but the Footsie is genuinely one of the most useful things to understand if you want to make sense of investing in the UK. So here’s the whole thing in plain English, with no assumed knowledge.

What the FTSE 100 actually is

The FTSE 100 — said “Footsie” — is a list of the 100 largest companies listed on the London Stock Exchange, measured by market value. “FTSE” comes from the old name, the Financial Times Stock Exchange. It launched on 3 January 1984 at a starting value, or base, of 1,000 points. Everything you hear about it going “up” or “down” is measured against that original line in the sand.

Importantly, the FTSE 100 is an index — a number that tracks the combined value of those 100 companies. It isn’t a company, a fund, or something you can buy a slice of directly. It’s a thermometer for a chunk of the UK’s biggest businesses: banks, oil giants, miners, pharmaceutical firms, supermarkets, and the like.

How the 100 are chosen — and why it keeps changing

Membership is based on market capitalisation — a company’s share price multiplied by the number of shares it has. The biggest 100 on the exchange make the cut. This list isn’t fixed: it’s reviewed every quarter. If a company shrinks and drops out of the top 100, it gets relegated; a fast-growing company climbing the ranks gets promoted in. It’s a bit like a football league table, with promotion and relegation four times a year.

The index is also weighted by market cap, which is the part people miss. The companies aren’t treated equally. A giant worth £150 billion moves the index far more than a member worth £5 billion. So when the Footsie jumps, it’s usually because a handful of the very largest constituents had a good day — not because all 100 moved in lockstep.

FTSE 100 vs FTSE 250 vs FTSE 350

The FTSE 100 has some siblings, and knowing the difference makes you sound genuinely clued-up.

Here’s a quirk worth knowing: because so many FTSE 100 firms earn their revenue globally — selling oil, drugs, and consumer goods all over the world — the FTSE 100 is often more of a bet on the global economy than on Britain specifically. The FTSE 250, full of mid-sized companies that do more of their business at home, is usually treated as the better barometer of the actual UK economy.

Why this matters to you as a beginner

Trying to pick individual winning companies is hard — even the professionals get it wrong constantly. The neat trick the FTSE 100 unlocks is that you don’t have to. Instead of betting on one firm, you can effectively buy a tiny slice of all 100 at once. That’s the heart of diversification: spreading your money so no single company sinking your whole pot. We go deep on this idea in Risk and Diversification.

Owning a basket of 100 large companies smooths out the bumps. One has a terrible year, but another has a brilliant one, and the index as a whole tends to be steadier than any single share. It’s the closest thing investing has to a sensible default for a beginner.

So how do you actually “buy the FTSE 100”?

You can’t buy an index directly — remember, it’s just a number. What you buy is an index fund or an ETF (exchange-traded fund) that is designed to track the FTSE 100. When you put money in, the fund spreads it across all 100 constituents in the right proportions, so your investment rises and falls roughly in line with the index. If the FTSE 100 goes up 5%, a good tracker should too (minus a small annual fee). The full mechanics live in Index Funds and ETFs Explained.

That last point is the standard beginner move: hold your tracker inside an ISA wrapper so HMRC doesn’t take a cut. New to ISAs? Start with What Is an ISA? and then try our ISA Explorer to see which one fits you.

A few honest caveats

The FTSE 100 is not a magic money machine. It can fall — sometimes sharply — and it has gone through long, frustrating periods of going nowhere. Past performance tells you nothing about the future. And because it’s heavy on older industries like oil, banking, and mining, it behaves quite differently from, say, a US tech index. This is education, not financial advice, and when you invest your capital is genuinely at risk — you can get back less than you put in.

Common questions

Does the FTSE 100 pay me anything?

Many FTSE 100 companies pay dividends — a share of their profits handed to shareholders. The FTSE 100 is actually known for being fairly generous on dividends compared with some other indices. If you own a tracker, those dividends either get paid to you or are reinvested, depending on the fund you choose.

Is investing in it the same as gambling?

No — though it isn’t risk-free either. Gambling is a one-off bet with fixed odds against you. Buying a diversified slice of 100 real, profit-making businesses and holding it for years is a fundamentally different activity. The risk is real, but time and diversification are on your side in a way they never are at a casino.

How do I start without risking real money?

Get a feel for it first. Our free trading simulator gives you a virtual £10,000 to practise with — zero real money on the line. When you’re ready to commit actual cash, our guide to how to start investing with £100 shows you the practical first steps.

Next time you hear “the Footsie closed up forty points,” you’ll know exactly what just happened — and, more importantly, how ordinary people actually put a few quid behind it.