The FTSE 100 – an index of the UK’s largest 100 listed companies by market capitalization – has become a common way of gaining access to the UK stock market and monitoring economic health in the country.
The index’s market capitalization has risen sixfold since its establishment in 1984. Since a stock index is essentially a number reflecting the growth or decline of a group of securities on a stock exchange, you cannot personally invest in it.
An alternative means of exposure is to invest in FTSE 100 shares or in exchange-traded funds (ETFs). Here’s a simple guide you need to follow to effectively buy FTSE 100 Stocks
When you invest in an FTSE 100 ETF, you spread your capital essentially across the UK’s top 100 companies on the London Stock Exchange (LSE). A weighted tracker is the most common type of FTSE 100 ETF.
Investing in the FTSE 100 can be an attractive option for those looking to diversify their exposure, as ‘the footsie’ consists of a vast array of sectors. Risk mitigation is believed to be due to a decline in one sector being offset by an increase of another.
You may choose to focus on a handful of companies when investing in the index, or you may be able to spread your investment across all constituents using an FTSE 100 ETF.
Invest in FTSE 100 Stocks
Based on stringent criteria that include stock price, liquidity, and nationality of the company, the companies that have made it on the list of FTSE 100 constituents are chosen.
Though changes to the constituents of the FTSE 100 do occur, they are not that frequent. This means stocks on the index are also considered likely to stand the test of time.
You invest in FTSE 100 stocks, in the expectation that they will increase in value and you can sell them for a profit later on. You earn shareholder benefits such as voting rights and dividend payments when you buy shares straight out.
FTSE 100 stocks are common with investors with an average dividend yield of 4.4 percent, partially because of the healthy dividends they offer.
This has helped keep their shareholders’ confidence in the companies. If we look at the returns over five years – the money shareholders will see if they reinvested their dividends over five years per year.
Here are some of these companies that the FTSE 100 includes.
- Royal Dutch Shell (RDS) – Despite turmoil on the oil market, the oil giant ‘s shares continued to grow and averaged a 50% return over five years.
- British American Tobacco (BATS) – Multinational shareholders reported a five-year return of almost 70%.
- Unilever (ULVR) – Another common option among FTSE 100 investors, the company, made five-year returns of about 80 percent to its shareholders.
Invest in FTSE 100 ETFs
The exchange-traded funds (ETFs) are securities that are bought and sold on stock exchanges, such as bonds, but often consist of a variety of assets – often called a bin. These are designed to monitor underlying benchmark results such as the FTSE 100.
If you invest in the FTSE 100, you distribute your funds effectively around the top 100 firms in the UK, which makes it necessary to know precisely how your money is being invested.
A weighted tracker is the most common type of the FTSE 100 ETF, which explicitly mirrors the FTSE 100 make-up.
You Can Trade the FTSE 100
Trading the FTSE 100 gives you the ability to take advantage of the falling value index as well as the rising value index.
Through financial instruments such as futures and CFDs, you can trade the FTSE 100 index, FTSE 100 stocks, and FTSE 100 ETFs. You are forced to downplay the full value of an asset upfront when you spend.
But when you use derivative products, you can swap them using leverage. Leveraged products allow you to gain full market exposure by simply putting down a fraction of the required capital – known as margin.
Trading also has significant tax advantages over traditional investing. There is no stamp duty when you trade CFDs, and you can compensate for any capital losses on profits.
When you plan to trade the FTSE 100, having a risk management policy that will reduce your losses if the market moves against you is important.
Whether you’re trading or investing in the FTSE 100, it’s important to make sure you’ve created an appropriate strategy and decide how you’ll manage your risk. If you do that you can find financial success with FTSE 100.