Financial Times Stock Exchange (Footsie): Explained | TIOmarkets
BY TIO Staff
|July 9, 2024The Financial Times Stock Exchange, commonly referred to as the "Footsie," is a term that is often heard in the world of trading. But what exactly does it mean? In this comprehensive glossary entry, we will delve into the details of the Footsie, its history, its significance, and how it functions in the trading world.
Understanding the Footsie is crucial for anyone involved in trading, as it provides a snapshot of the performance of the UK's largest companies. It is a barometer of the nation's economic health and a key indicator for traders and investors worldwide. Let's begin our deep dive into this fascinating topic.
What is the Financial Times Stock Exchange (Footsie)?
The Financial Times Stock Exchange, or Footsie, is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. It is seen as a gauge of prosperity for businesses regulated by UK company law. The index is maintained by the FTSE Group, a subsidiary of the London Stock Exchange Group.
Introduced in 1984, the Footsie has since become one of the most widely used stock indices and is seen as a reflection of the health of the UK economy. It is used by investors and traders as a benchmark for investment performance, a tool for asset allocation, and as an underlying for a wide range of derivative products.
Components of the Footsie
The Footsie is made up of 100 of the largest companies listed on the London Stock Exchange. These companies are selected based on their market capitalization, which is the total market value of a company's outstanding shares of stock. The companies that make up the Footsie represent a wide range of industries, including banking, energy, pharmaceuticals, and more.
It's important to note that the composition of the Footsie can change. Companies can be added or removed from the index based on changes in their market capitalization. This process is known as rebalancing and typically happens on a quarterly basis.
How is the Footsie Calculated?
The Footsie is calculated using a market-capitalization weighted methodology. This means that companies with a larger market capitalization have a greater influence on the index's value. The index's value is calculated in real-time and is updated every 15 seconds during trading hours.
The calculation of the Footsie is fairly complex. It involves taking the total market capitalization of the companies in the index, dividing it by a particular number known as the "index divisor," and then multiplying the result by the index's base value. The base value is an arbitrary number chosen when the index was first created and does not change.
The History of the Footsie
The Footsie was launched on January 3, 1984, with a base level of 1000. It was developed by the Financial Times and the London Stock Exchange, hence the name Financial Times Stock Exchange. The index was designed to give a broad and comprehensive overview of the performance of the UK's largest companies.
Over the years, the Footsie has seen significant changes in its composition. It has weathered economic recessions, booms, and busts, and has evolved to reflect the changing landscape of the UK economy. Its history provides a fascinating insight into the economic and business trends of the past few decades.
Major Milestones in the Footsie's History
One of the major milestones in the Footsie's history was in 1995 when it reached the 3000 mark for the first time. This was a significant moment as it reflected the growth and expansion of the UK economy during the 1990s.
Another key milestone was in 1999, when the Footsie reached an all-time high of 6950.6 on the last trading day of the year. This was during the height of the dot-com boom, a period of extreme growth in the stock markets driven by investments in internet-based companies.
The Footsie in Recent Years
In recent years, the Footsie has seen a number of significant events. The 2008 financial crisis, the European sovereign debt crisis, and the Brexit vote all had significant impacts on the index. These events have led to periods of volatility, with the Footsie experiencing significant rises and falls.
Despite these challenges, the Footsie has remained a key indicator of the UK's economic health. It continues to be widely used by investors and traders around the world as a benchmark for investment performance and a tool for asset allocation.
The Significance of the Footsie in Trading
In the world of trading, the Footsie holds a significant place. It is one of the most widely followed indices in the world and is used as a benchmark by investors and fund managers to gauge the performance of the UK stock market.
Traders use the Footsie to gain exposure to the UK market and to diversify their portfolios. It is also used as an underlying asset for various derivative products, such as futures and options, allowing traders to speculate on the future direction of the index.
Trading the Footsie
Trading the Footsie can be done in a number of ways. One of the most common methods is through exchange-traded funds (ETFs) that track the performance of the index. These funds allow traders to buy and sell shares that represent a proportionate ownership in the portfolio of stocks that make up the Footsie.
Another method is through futures and options contracts. These derivative products allow traders to speculate on the future direction of the Footsie without having to own the underlying stocks. This can provide opportunities for profit, but also carries a high level of risk.
Strategies for Trading the Footsie
There are many strategies that traders can use when trading the Footsie. One common strategy is trend following, which involves identifying the direction of the market's trend and making trades that align with that trend.
Another strategy is swing trading, which involves taking advantage of short-term price movements. This requires a good understanding of technical analysis and the ability to accurately predict market movements.
Conclusion
The Financial Times Stock Exchange, or Footsie, is a crucial part of the trading world. It provides a snapshot of the health of the UK's largest companies and serves as a key indicator for traders and investors worldwide. Understanding the Footsie, its components, and how it is calculated can provide valuable insights for anyone involved in trading.
Whether you're a seasoned trader or just starting out, having a solid understanding of the Footsie and its significance can help you make informed trading decisions. As with any form of trading, it's important to do your research, understand the risks involved, and develop a sound trading strategy.
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Now that you're equipped with knowledge about the Footsie and its impact on the trading landscape, it's time to put that understanding into action. Join TIOmarkets, a top-rated forex broker, and step into the world of online trading with confidence. With over 170,000 accounts opened across more than 170 countries, our platform offers you the opportunity to trade over 300 instruments across 5 markets, all with low fees. Enhance your trading skills with our comprehensive educational resources and step-by-step guides. Ready to embark on your trading journey? Create a Trading Account today and start trading Forex, indices, stocks, commodities, and futures markets with TIOmarkets.
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