Switch on the financial news at any given time and you are likely to hear the words FTSE 100. It’s a listing that originated back in 1984 and was originally co-owned by the Financial Times and the London Stock Exchange. The FTSE is a list of the top 100 UK companies that are on the London Stock Exchange, ordered by their full market value.
You will find many well-known UK companies on the FTSE 100, including Sky, Sainsbury’s, BT and Barclays. These are generally referred to as blue chip companies and their position on the list changes in accordance with their performance.
In addition, there is the Index which is usually seen as a measure of how the UK is doing economically. The high point for the FTSE100 Index came at the beginning of this year when it reached 7,354. One of its lowest points came shortly after the market crash and slump during March 2009.
How is the FTSE100 Decided?
To make it a useful barometer, of course, the list has to be changed regularly to reflect performance. This is done every quarter when a committee of independent experts are brought together to judge that performance. Below the FTSE100 is the FTSE250 and changes between these two bands can happen quite regularly, particularly for those near the bottom of the list. The only other time when a review of the list might be considered is when there is a merger or takeover that changes the dynamics of a particular company.
Changes don’t always happen. It’s not unusual for the list to remain the same after a review has been carried out. During other times, there can be quite a lot of toing and froing, something that happened more recently during the rise and success of dot coms in the late 90s.
What it Means for Small Business
At first sight, the FTSE100 is seen as a barometer of the state of the country in terms of business and finance. Allied to this is the FTSE100 Index which is the single figure you see on the news and this rises and falls according to how well the economy is doing. You might see a lull before a budget for example and a complementary rise when future policy is clarified. There can also be a drop when there is a major event such as last year’s Brexit which creates uncertainty or even the election of a new president in the US. More interesting can be the difference between indices – when Trump was inaugurated, there was not a great rise in the FTSE100 but the Dow Jones Index breached an all-time high of 20,000.
The number is calculated by taking the market capitalisation of the top 100 businesses and their index value. The market capitalisation is affected by the share price of the company and the index is calculated 4 times every minute on the Stock Exchange. Because of this link to shares, changes in the index can have a significant impact on business and investments. For example, if you have a pension, a sudden fall in the FTSE can see a related fall in your own fund.
For small businesses, the FTSE100 is also an aspiration. It gives you the chance to see the top companies and take a deeper look at how and why they have been successful. It’s a chance to follow best practice and look at the latest trends in the UK economy. When the FTSE100 fell following the Brexit decision last year, it was an indication that we might well be in for turbulent times but the index has recovered since then. What had a little more importance at the time was the fall in the value of the pound, particularly for SMEs exporting to other countries.
Perhaps just as important to SMEs are the other bands of the FTSE, the 250 and 350, which can give a clearer overview of the economy and which businesses are beginning to create an impact. Few small business reach the stage when they can compete with the large corporations and their share values. Getting into the lower bands is the first step to this, however. Having your SME noted on the FTSE can improve share values and provide impetus for investment and growth.
Essentially, the FTSE100 is a fair-weather barometer for the state of the economy and as such is a useful guide for businesses and investors on how we are all doing. For some businesses, this is more important than others, particularly those that are concerned with financial matters. For companies that export abroad, the value of the pound is often a better indication of their prospects. The relation between this and the FTSE is not always straight forward. In recent times, a fall in the FTSE has seen a rise in the pound and vice versa.
The combined power of SMEs is much greater than all the companies on the FTSE100 together. Our small businesses £1.6 trillion of the UK’s turnover and they make a huge contribution to the economic health of the country. They also create around three times the number of jobs the big players do.