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FTSE 100: How to Invest and Buy Shares

The FTSE 100 is a share index. It lists the shares of the top 100 UK companies. The name “FTSE 100” (Financial Times Stock Exchange 100) is a combination of two establishments – the Financial Times (FT) and the London Stock Exchange, plus the number of stocks or shares in the index.

🙋 What does FTSE stand for?Financial Times Stock Exchange (FTSE)
🏭 What does the FTSE 100 consist of?100 largest companies (by market capitalisation) listed on the London Stock Exchange (LSE).
💰 Who owns the FTSE 100?The London Stock Exchange Group

This Moneyfarm blog looks at FTSE 100: How to invest? – and will tell you about buying shares in companies in the FTSE 100 index, index tracker funds, exchange-traded funds (ETFs) and more – in other words, the basics of how to invest in FTSE 100 listed companies.

What to be aware of before you begin investing in FTSE 100

Although the shares listed in the FTSE 100 are UK companies, many have significant overseas operations. Therefore, it may not necessarily be the best indicator of the UK economy. On the other hand, the FTSE 250 index is often used as a reference to the UK economy’s health because it comprises a smaller percentage of companies with international operations.

Because of this, many invest outside the “100″ by buying shares from companies in the “250”. Investors also buy shares in overseas businesses, such as US companies whose shares are quoted on the S&P 500 index.

How is the FTSE 100 calculated?

The FTSE 100 represents over 80% of the London Stock Exchange’s total market capitalisation. The market valuation of an individual company is worked out by multiplying the share price by the number of shares it has issued. So, a company with 1 million shares each valued at £10 would have a market capitalisation value of £10 million.

As mentioned earlier, the FTSE 100 comprises the 100 companies with the highest market capitalisation – so-called “blue-chip” companies. Each company’s market capitalisation is reviewed every quarter.

How to buy an FTSE 100 index tracker fund

To get our discussion into actually investing in the FTSE 100 underway, let’s begin with how to invest in an FTSE 100 index fund.

There are two types of index trackers. The first is the full replication trackers, which buy shares in all of the companies included in an index. The second type – called partial replication funds, invests in a sample of the companies that they think best represent the whole within an index.

Index tracker funds are what are known as “passive funds.” Computers usually manage them. Therefore, they are cheaper to operate as compared to actively managed funds. However, these are man-managed and thus carry heavier management fees. OCFs (Ongoing Charges Figures) vary from provider to provider, so you need to do your homework and check them out.

Before deciding which fund to go with, you need to be aware that index tracker funds don’t contain bonds. This will only be a concern if you are worried about the potential volatility of FTSE 100 shares in your investment portfolio, as bonds can be used to aid stability. However, because value-wise, they are more stable than shares, they generally come with lower returns. ETFs, on the other hand, can include bonds.

After you’ve decided which fund to invest in, the next step in how to invest in an FTSE index is to select an investment platform. An investment platform will also charge a fee, which varies from platform to platform.

Having chosen your platform, all that is left is to deposit money and invest in your selected fund.

You should also be aware that you can invest in a tracker fund through other investment accounts, a SIPP (Self-Invested Personal Pension), or a stocks and shares ISA.

How to invest in FTSE 100 shares

First, if you want to know how to buy FTSE 100 shares (as mentioned above), you will have to choose a share dealing or trading platform. You can find a list of some of the best platforms on the web.

To make you aware – if you plan to acquire FTSE by buying shares, you are not limited to only investing in the FTSE 100 index. You can make your choices from the FTSE All Share index. This index not only gives you access to FTSE 100 shares, it includes FTSE 250 shares and shares in the FTSE Small Cap Index.

The small cap index comprises of companies outside of the FTSE 350 Index, which is a combination of the 100 and 250 indexes. In total, the “small cap” represents around 2% of the UK market capitalisation. However, we are focussing on the FTSE 100 stock market index.

Once you’ve chosen your preferred share dealing or trading platform and have opened an account, you will have to fund your account, which you can do via an online bank transfer or debit card. Next, select the FTSE 100 company or companies you wish to invest in, and hit the “buy” button.

How do FTSE 100 ETFs work, and how to invest in one

Another answer to how to invest in FTSE 100 is you can buy an ETF (exchange-traded fund).

Newbie investors often choose ETFs, and there are hundreds to choose from. Why? It’s because rather than exposing yourself to the ups and downs of the share price of an individual company, which can plummet almost in the blink of an eye, ETFs, which comprise a portfolio of shares in several companies, mean you lessen the risk factor through diversification.

FTSE 100 ETFs work by tracking the performance of the shares listed within the Footsie (the nickname for the FTSE 100).

Even though ETFs and mutual funds are similar, some investors choose ETFs over mutual funds. The reason is that while you can only trade mutual funds at the end of the working day, ETFs can be traded anytime. For example, on the FTSE (which mirrors the LSE), this is 8 AM to 4:40 PM, Monday to Friday. This time flexibility is essential for investors whose ETFs are actively manageable. In addition, you can invest in either actively or passively managed ETFs.

The actual mechanics of buying an EFT are similar to those of buying stocks and index funds.

The different types of ETF

According to Statista, at the end of 2021, there were 8,552 ETFs worldwide. They come in various types, including bond ETS, commodity, currency, international, industry sector, and stocks ETFs – the list goes on. The finder.com website lists the 12 FTSE 100 ETFs from which you can choose.

FTSE 100 CFD trading

The initials CFD stand for “Contract for Difference,” and trading CFDs is another option when it comes to the FTSE 100 and how to invest.

Trading CFDs is about entering an agreement to exchange the value difference between the price of the FTSE when you open your position and when you close it. It’s a kind of spread betting. Simply put, you are gambling on whether the FTSE will rise or fall. If it appreciates, you make a profit; if it depreciates, you make a loss. It’s a sort of futures trading. However, it could be more complex.

CFDs are leveraged, so you only deposit a margin, which on the FTSE 100, is 5%. However, the amount you stand to gain or lose is the 100% value of the contract, not the 5% margin figure. Timewise, you can take up shorter- or longer-term positions. As far as an investment strategy goes, depending on your investor profile, this could be a risk too far.

The advantages and disadvantages of investing in the FTSE 100

Before you decide how to invest in the FTSE 100, you should consider the pros and cons. Here is a brief summary.

Advantages of investing in the FTSE 100

  • It grants you exposure to the top 100 blue-chip companies on the index
  • Easy to invest in index funds or ETFs
  • Many FTSE-listed stocks pay dividends
  • Thanks to the inclusion of “old economy stocks”, the FTSE 100 has held up reasonably well amidst recent turmoil. While the S&P 100 dropped 18% over the past year, the FTSE only dropped 4% – according to this Forbes article.

Disadvantages of investing in the FTSE 100

  • Your diversification is limited to UK stocks
  • Limited choice – not as much choice as the FTSE 250 or all-shares
  • You cannot beat the market when your investments follow the index
  • With a high percentage of the listed companies involved in alcohol, fossil fuels, tobacco, and armaments, it is not very ESG friendly
  • Minimal exposure to companies in the hi-tech sector.
  • Susceptible to unfavourable GBP v foreign currency exchange rates

Final thoughts

When considering how to invest in  FTSE 100 and how to invest money in general, you must never forget that it’s capital at risk with individual company shares. It is also noteworthy that you consider your short vs long financial needs before deciding whether or not to begin investing.

If the FTSE 100 ETF’s share price action makes you nervous but still want to invest, you will be better suited to taking out stocks and shares ISAs with diversified portfolios, rather than individual stocks or ETFs.

Another option is starting a general investment account (GIA). A GIA will give you access to all kinds of investment vehicles. However, you are better off making the best use of tax wrapper investment accounts and your annual personal ISA allowance. You only want to give the taxman what you must.

FAQ

How does investing in FTSE 100 work?

Investing in FTSE 100 is an investment option which offers investors passive exposure to the top 100 UK companies listed on the London Stock Exchange by market capitalisation. The fund pools investors usually pool money together to buy stocks of various companies, and it tracks the performance of the FTSE 100 Index.

What is the difference between FTSE 100 and 500?

Even though the FTSE 100 and the S&P 500 are market-capitalization-weighted indices, the FTSE 100 consists of the top 100 stocks listed on the London Stock Exchange, while the S&P 500 consists of the best 500 stocks listed on the US stock exchanges. Due to the size of the FTSE 100, it contains more cyclical stocks, while the S&P 500 contains more risky technology stocks. The FTSE 100 is less diversified than the S&P 500, but FTSE 100 has a concentrated index with safer stocks.

What are the benefits of investing in the FTSE 100?

The benefits of investing in the FTSE 100 include lower risk due and high diversification due to exposure to the 100 companies in FTSE 100.  FTSE 100, like most index funds, is a passive investment and does not require active management. Therefore, investors are not required to keep track of each security they own, review its performances, or monitor its earnings reports and financial statements.

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*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.