intro – ftse 100:
FTSE 100 (Financial Times Stock Exchange 100), also called Footsie/Footsy. It is the stock index of top 100 companies listed on the London Stock Exchange, in terms of market capitalisation. It is managed by the FTSE Group, a subsidiary of the London Stock Exchange Group.
While it is meant to measure the strength of the UK economy, since most of the large FTSE 100 companies are global, it’s value reflects the strength of the companies’ global operations, and not so much, the UK economy. A better gauge of UK economic activity is the FTSE 250 index.
a detour back in time
FTSE 100 came into existence, on January 3, 1984 with a base level of 1,000. It replaced the legacy FT30 as the main indicator for the performance of companies listed on the London Stock Exchange (LSE). FT30 was launched on July 1, 1935, making it the oldest continuously used index in the UK. It was originally called FN – Financial News Ordinary Index. Financial News was one of the predecessor companies behind FT(Financial Times).
One of the main reasons why FT30 fell out of favour by economists and market participants alike is the method of calculation. Because, FT30 is calculated using Geometric Mean and equal weighting is assigned to all 30 companies. Hence, it understates the underlying performance. In contrast FTSE 100 and all other major indices assign weightings based on each company’s market capitalisation.
Secondly, the composition of the FT30 only changes when there is a bankruptcy, merger or acquisition. On the other hand, FTSE 100 is reviewed quarterly where close to a dozen companies may get relegated and promoted.
The only working day FTSE 100 was not functioning was Friday 16-Oct, 1987, the day after the great storm. As a result, biggest one day drop was on 20-Oct, 1987. The index fell by 12.22% or 250.7 points also known as The Black Monday.
back to today
FTSE Group calculates the FTSE 100 index real time and publishes every 15 seconds. About 80% of the market cap of the entire London Stock Exchange is represented by these 100 companies that comprise the index. A high market capitalisation is the minimum requirement to earn a place on the index. However, it does not guarantee a place in and of itself. There are other considerations such as the industry, company’s UK origins etc.
The purpose of any major stock index is to measure the health of the country’s economy. Because an index(in theory) is not affected by impact on a single company or industry. Instead, it offers a generalisation over the top companies that adopt the highest levels of corporate governance standards.
FTSE 100 trading
There are now, a number of FTSE related financial instruments – derivatives, futures, index linked funds and ETF’s. Despite of the fact that, FTSE 100 is not a financial asset in and of itself.
These products either reference or try to replicate the performance of FTSE 100. For example, an index linked passive fund may hold the shares of companies in the exact(or close to exact) same weighting as the FTSE 100. Consequently, the fund managers rebalance the fund as and when there are changes in FTSE 100 composition.
Almost all big brokers now offer a 24 hour, FTSE 100 CFD and spreadbetting market outside of London Stock Exchange official trading hours. However, FTSE’s infrastructure can only calculate FTSE 100 value during LSE trading hours.
This is because the share prices of the constituent stocks are not publicly available outside of LSE trading hours. However, since there can be market news that may cause a trader to want to speculate on the opening price of FTSE 100 next day, these products offer that option.
Therefore, price shown on broker sites outside of trading hours is based on other benchmark indices that are open in their respective market location, for eg. Dow Jones. In addition, the price also depends on the FTSE 100 Futures market, the FX rates and index linked funds and ETF’s being traded on other global stock exchanges. While predicting single stocks requires considerable research on that particular company, an index is more sensitive to macroeconomic data.
variables and factors that impact FTSE 100
sterling(GBP) rate in fx markets
Firstly, as GBP appreciates in value, this causes a drop in foreign investment, since foreign investors get less GBP for their currency. Hence, large global investors will not use their GBP reserves to buy UK stocks. On the other hand, depreciation of GBP will make UK stocks cheaper. Hence, the index will rise in this scenario.
Secondly, higher inflation means depreciation in the value of GBP and that the UK companies are able to sell their goods and services at higher prices. Therefore, the index will rise in the short term as companies are bringing in more cash. However, this will then, translate to higher employee wages and higher cost of goods and raw materials. Hence this will result in UK companies’ share prices to then drop in the longer term, if there is sustained high inflation.
Thirdly, short and medium term interest rates spike will impact the stock index. This is because higher rates will mean a (relatively)risk free alternative to stocks – a more risky asset. However, longer term high rates will lower bond yields and therefore, the large investors’ money will move to stocks, causing FTSE 100 index to spike.
and the rest
Finally, other factors such as unemployment rate and PMI(Purchasing Managers Index) also impact the FTSE 100. For instance, high unemployment rate will imply drop in consumer demand and this would cause a downward trend for stocks. In contrast, a higher PMI in the UK will mean an increase in economic activity, leading to higher employment and a high demand for goods and services produced by FTSE 100 companies.
It is important to spend some time learning the history and basics. This time spent will yield dividends when you are trying to predict movement of an asset. Also remember that you are more rational before you place a trade. So, it’s important to set some rules. If you like market conditions and they fit what your rules suggest, go for it. If the conditions for the rules don’t fit what you see in the markets, don’t trade for it’s own sake. You don’t have to trade every day. The point of having rules is to run them to your favour, and not let them run you.
Day trading follows the same rules we use for life. Successful trading is the art of using knowledge and skills at the right time. It is also essential to set some limits once you open a position. For example, you may impose a limit on yourself to not keep a trade open for more than 20 days. Finally get access to good tools that can help you achieve your trading goals. It’s best to try out a lot of things on paper money accounts before risking your capital.
Despite of all the rules, limits and right mindset, random events will happen. So always have a contingency plan. A perfect system or rules don’t exist. And, this is a good thing. Otherwise, someone will work it out and own half of the free world. All algorithms, tools, systems and rules are based on a snapshot of data. So always pay attention to news and data on a given day.
how to apply this to trading
STOKAI provides daily prediction using algorithms based on all factors that impact FTSE 100 price and evolves this over 10 days in the future. Tutorial and brief user guide is available here – Tutorial
Stokai is a product of Rumble Horse Tech ltd. A company registered in England.