How to Invest in the FTSE 100

You’ve likely heard of at least some of the companies on the FTSE 100, as the list includes banks, oil companies, and pharmaceutical giants. The top 5 companies in the FTSE index are as follows:

1. AstraZeneca (AZN) – AstraZeneca is currently the biggest company by market cap included within the index, standing at £179.12 billion at the time of writing. The pharmaceutical giant was founded in 1999 and the COVID rollout helped to increase their revenue substantially.

2. Shell (SHEL) – Shell is one of the biggest petroleum providers, in the UK and globally. With oil production being an essential part of the modern world, Shell has a very high market capitalization, which currently stands at £155.61 billion.

3. HSBC Holdings (HSBA) – HSBC is one of the banking services providers in the UK, with around 39 million customers worldwide. This incredibly large customer base is reflected in its market cap, which stands at £119.55 billion.

4. Unilever Group (ULVR) – With 400 brands in their Group including Magnum and Ben & Jerry’s, Unilever is present in our everyday lives. The company’s status as a giant of consumer goods is reflected in its place in the FTSE 100 and market cap value of £101.47 billion.

5. BP (British Petroleum) – As is the case with Shell, the chances are that you’ve filled up at a BP garage at least once. The company’s market cap currently stands at £81.86 billion, making them the fifth largest company in the index.

The S&P 500 index, which includes the 500 largest companies by market cap listed on US exchanges, is usually investors’ first choice when it comes to indices. This isn’t surprising – as of January 2023, the value of stocks listed on US stock exchanges made up 42% of the global total. Being exposed to companies of such size and calibre is a wise thing to do. However, this does not mean that the FTSE 100 index should be overlooked as part of your investment portfolio.

First off, the commodity-led index offers a viable way to diversify your portfolio if you are already invested in the major indices across the pond, namely S&P 500 and especially the tech-led Nasdaq 100.

Footsie is also a truly global index – FTSE 250 may be more reflective of the British economy as a whole, but a substantial amount of revenue of FTSE 100 (82%) comes from overseas markets.

And last but not least, Footsie has an average dividend yield of about 4%, much higher than the S&P 500 average of 2.2% – which makes the index attractive for income investors.

This essentially does what it says on the tin – you buy the stocks and shares as a whole value.

However, while this means that you will benefit more than investing in a fund if the value of the share goes up, the reverse is also true. If the value of the share drops, the value of your investments will take a harder hit than if you invested in a fund.

While buying individual stocks and shares offers you the opportunity for greater ownership of a company, this makes it quite costly full stop depending on the type of company you choose, you may only be able to purchase a smaller number of shares.

Some of the top-performing companies in the FTSE 100 index include Shell, HSBC, and Unilever. As demand for their products and services is likely to continue, they will likely remain among the top performers in the index.

Purchasing stocks and shares in individual companies may not be suitable if you are a beginner investor, as it limits your exposure to the market and increases the risk of losing money due to market volatility.

Investing through a fund is a very popular option. When investing in both passive funds and active funds, you can own shares of a company, but your investment is spread out according to the weighting of the fund portfolio rather than being tied up in a single company.

One of the benefits of investing through a fund is that it provides investors with the ability to invest in the FTSE 100 index at a much lower cost than buying shares outright. As well as this, while investing in a fund lowers the value of each individual investment, it also means that investors have better protection from market volatility.

While funds allow investors to gain exposure to the market, diversification allows other investments in the fund to pick up the slack if individual companies suffer a drop in value. The protection, diversification, and lower cost of entry make a fund well-suited for beginners.

There are different types of funds available to investors, and each type has its benefits and drawbacks.

Index funds

Index funds track the performance of a specific financial market index, such as the FTSE 100. This is regardless of the performance of the chosen index, so if the index increases in value, the index fund will do the same. The reverse is also true. However, index funds tend to not be an exact match to the market, so there may be a slight difference in gains and losses.

As they are passive, they are ideal for long-term investors, as well as those who want to adopt a hands-off approach. What’s more, the absence of a human element means that maintenance and management costs for most index funds are usually very low. This makes them ideal for budget-conscious investors.

Unlike Exchange Traded Funds, index funds cannot be bought and traded throughout the day. Rather, index funds are priced at a specific point every day.

Exchange-traded funds (ETFs)

Investors looking to use ETFs can choose from both passive and active investment styles, depending on their preferences. However, most ETFs are generally passive rather than active.

Like any fund, ETFs consist of groups of asset classes. However, unlike a mutual fund, ETFs are bought and sold on an open exchange in the same way as stocks, and can also be traded throughout the day. As such, the value of an ETF can fluctuate more than a standard index fund.

Trading derivatives involves speculating on the direction of the market and investing your money accordingly. Depending on your investment style, this can take different forms – most notably, CFDs and spread betting. Both trading vehicles allow you to use leverage, but be careful: while this can magnify your gains, it also does the same to your losses.

Spread betting

Unlike trading CFDs, spread betting is classed as gambling under UK law, meaning that any money you make is not subject to Capital Gains Tax.

With spread betting, you are agreeing to buy or sell an investment at a specified time in the future. While this can prevent losses from magnifying – which is particularly useful if you have opted to choose leverage. However, the downside to this is that you may risk missing out on potential gains if the market turns in your favour after your trade has closed.

Contracts for Difference (CFDs)

Trading contracts for difference, or CFDs, also allow you to speculate on the movements of the market, but unlike spread betting, there is no time limit on the trades you make. While this prevents you from missing out on the market turning in your favour, it also increases the risk of your losses running out of control.

Unlike spread betting, returns you get from CFDs are subject to Capital Gains Tax.

While the FTSE 100 is a popular choice, many potential investors may struggle to decide whether to invest in the FTSE 100 or other major indices such as the S&P 500 or the Dow Jones.

Each index differs from the others, so we will look at the performances, costs, compositions, and risk levels of each index to see how they compare against each other.

Despite the comparatively strong performances of the US indices, it is important to remember that past performance is not a reliable indicator of future success.