You’ll often hear the FTSE 100 and FTSE 250 has gone up or gone down. But what exactly is the FTSE 100 and FTSE 250? And what are the differences you need to be aware of when investing? There’s quite a few.
Firstly what does the FTSE mean?
The term FTSE is derived from Financial Times (FT) and London Stock Exchange (SE), the combination of the FT and SE make-up the term ‘FTSE’. The FTSE reflects shares that are traded on the London Stock Exchange – think of the London Stock Exchange as a ‘marketplace’ like eBay, but for shares.
The FTSE 100 and FTSE 250 – Size Matters
The FTSE 100 and FTSE 250 (combined ‘FTSE 350) reflect the largest companies that are ‘listed’ or ‘housed’ on the London Stock Exchange. The companies are defined in size by the market capitalisation – this is the share price of the company x the number of shares in issue. Companies of the FTSE 100 or FTSE 250 are often referred to as ‘constituents’.
Promotion and demotions to and from the FTSE 100 can happen – usually a handful of firms will be promoted from the FTSE 250 to the FTSE 100, conversely a handful of firms will also be demoted from FTSE 100 to FTSE 250. And it all comes down to their market capitalisation.
Also referred to as an ‘index’ the value of the FTSE 100 and FTSE 250 is also reflected in points on a daily basis. Established in 1984 with a base of 1,000 points, over time the FTSE 100 has reached over 6,500 – so you can see here why they tend to say investing is a long-term game!
The Differences between Two – Location, Location, Location
The telling difference beyond the market value of the firms on the FTSE 100 and FTSE 250 respectively is how global they are.
On the FTSE 100 you will find constituents such as Vodafone and HSBC – truly global, exceptionally large businesses. But on the FTSE 250, you are more likely to find firms which have a bigger presence in the UK specifically or more of their core target market.
This is why on the FTSE 250 you will see firms such as housebuilders including Crest Nicholson as well as the likes of Greggs. And it is also why the FTSE 250 is often seen as a good reflection of the health of the UK economy.
However, there are exceptions to this and many FTSE 250 firms will have global operations, they just won’t be as large as their counterparts on the FTSE 100.
Does it matter where I invest?
Generally, the FTSE 100 is seen as the more ‘reliable’ index, this is because the large dividend or income payers tend to be constituents (the likes of BP). Pension funds are more likely to be invested in the FTSE 100 because of the growth prospects and more reliable income.
Although, this doesn’t mean investing in the FTSE 250 isn’t worthwhile. There are some very large companies on great growth trajectories who will eventually find themselves on the FTSE 100. For the growth investor, the FTSE 250 may well be a better play.
Regardless of the differences, there is one key common element – if markets rise, both the FTSE 100 and FTSE 250 tend to rise. But if they fall, they both tend to fall. So they are not too dis-similar after all!