Even if you couldn’t care less about investing, you’ve probably heard of the FTSE 100. The FTSE 100 is the best-known stockmarket index in the UK. In effect, it sums up the fortunes of Britain’s biggest listed companies into one single number, by combining them all into one hypothetical portfolio.
Why is this useful? It gives a representative snapshot of how strong or weak the market in big UK companies is at any given point in time. But more importantly, it serves as a useful benchmark.
If you invest with a fund manager who says they will put your money into big UK companies, then how do you know if they are doing a good job or not? One way to tell would be to compare their performance to that of the FTSE 100. If they manage to beat the index over the long run, it suggests that their stockpicking skills are adding some value for you. If not, then why pay them to manage your money?
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
There are many different ways to construct an index. Most indexes, including the FTSE 100, are based on market capitalisation – that is, the share price of each company multiplied by the number of shares outstanding. In other words, the companies deemed most valuable by investors carry the most weight in the index.
The best-known indexes tend to be the ones that represent individual countries’ stock markets. Other indexes you may well have heard of include the Dow Jones or the S&P 500 in the US, and the Nikkei in Japan. However, there are literally thousands of different indexes available, and there are many different ways to build them.
As passive investing – which aims to track an index, rather than beat it – has boomed in popularity, index providers have become huge businesses. As investor demand for index funds that track specific themes, or specific investment styles has grown, index providers have created custom indexes to back these investment products.
Some fear that the boom in indexing may distort the flows of money into financial markets in disruptive ways. However, there is no doubt that index funds can be a very convenient and cheap way to build a diversified long-term investment portfolio.
To learn more about index investing, subscribe to MoneyWeek magazine.
-
Dividend heroes: the investment trusts that have increased their dividends for 20+ yearsInvestment trusts can be a good option for income-focused investors – but which trusts have consistently increased their dividends over the past 20 years?
-
Six reasons not to top up your state pensionA deadline to buy National Insurance credits and top up your state pension is fast approaching. Here’s why it may not be worth it for some people
-
Will FTSE 100 retailers Tesco and Sainsbury’s deliver further share price gains?Analysis After their recent strong performances, FTSE 100 retailers Tesco and Sainsbury's face a difficult future, but they are taking action to drive growth, says Robert Stephens
-
What is a dividend yield?Videos Learn what a dividend yield is and what it can tell investors about a company's plans to return profits to its investors.
-
FTSE 100 closes at another record highNews The FTSE 100 has closed at another record high, but what’s driving the index’s performance and can the rally continue?
-
Best FTSE 250 dividend stocks for high yieldsMoneyWeek analyses the FTSE 250 dividend stocks that could offer investors the greatest yields in 2025
-
High earners to pay nearly £2000 more in tax due to fiscal dragVideos The government froze tax thresholds, which will drag employees into higher tax bands as wages rise with inflation. We explain what fiscal drag is, and how to avoid it.
-
What is a deficit?Videos When we talk about government spending and the public finances, we often hear the word ‘deficit’ being used. But what is a deficit, and why does it matter?
-
Low-cost index funds for simple investingTips Index funds are an easy, low-cost way for investors to invest in a sector or asset class. Here’s a selection of the cheapest passive tracker funds on the market right now
-
Britain’s resilient blue chips – a refuge in the inflationary stormNews The UK's blue-chip FTSE 100 index has been the best-performing major stockmarket index so far this year.
