The Financial Times Stock Exchange, commonly known as the FTSE, is a key benchmark in the world of UK financial markets. It primarily refers to two major indices: the FTSE 100 and the FTSE 250. These indices serve as vital barometers of the health and performance of the largest companies listed on the London Stock Exchange (LSE).

The FTSE 100 index comprises the 100 largest companies by market capitalization listed on the LSE. These companies, often referred to as “blue-chip” stocks, represent a broad spectrum of sectors including finance, energy, consumer goods, and technology. The FTSE 250, on the other hand, tracks the next 250 largest companies after the FTSE 100, generally representing mid-cap firms with a more domestic UK focus compared to the multinational giants in the FTSE 100.

Understanding how the FTSE indices are calculated is essential for traders and investors. The indices are market capitalization-weighted, meaning each company’s influence on the index’s value depends on its total market value, which is calculated as the share price multiplied by the number of shares outstanding. The formula for the index value can be simplified as:

Formula: Index Value = (Sum of Market Capitalizations of Constituent Companies / Index Divisor)

The index divisor is a figure adjusted regularly to maintain continuity in the index value despite corporate actions such as stock splits, dividends, or changes in the list of companies.

For traders, the FTSE indices are widely used as benchmarks or trading instruments in their own right. For example, a CFD trader might take a position on the FTSE 100 index to speculate on the overall UK market direction without buying individual shares. Suppose a trader believes the UK economy will strengthen due to positive GDP growth figures; they might go long on a FTSE 100 CFD. If the index rises from 7,500 to 7,650 points, the trader gains the difference multiplied by their contract size. Conversely, a decline would result in losses.

One common misconception is that the FTSE 100 reflects the overall UK economy. While it does provide an important snapshot, many of the companies in the FTSE 100 are multinational corporations with significant revenues generated outside the UK. This can sometimes mean the index’s performance diverges from domestic economic conditions. For instance, during Brexit-related uncertainty, the FTSE 100 remained relatively resilient compared to the UK-focused FTSE 250, which experienced more volatility.

Another frequent question is about the difference between the FTSE indices and other global benchmarks like the Dow Jones or the S&P 500. While all are market cap-weighted indices, the FTSE 100 is UK-focused (albeit with global companies), whereas the S&P 500 represents the largest US companies. Understanding these differences helps traders diversify their portfolios and manage geographic risk.

Common mistakes among traders include over-relying on the FTSE 100 as a sole indicator of UK market health or assuming all FTSE companies have the same risk profile. The FTSE 250 often offers more exposure to UK economic trends and can be more volatile but potentially more rewarding for those looking to capitalize on domestic growth.

In summary, the FTSE 100 and FTSE 250 are indispensable tools for anyone trading UK stocks or indices. They provide insight into market trends, offer diverse investment opportunities, and serve as essential benchmarks. However, understanding their composition, calculation, and limitations is crucial for making informed trading decisions.