Known as the Footsie, it may be viewed as one of the market's barometers, often used as a measure against which to judge the performance of individual shares or a portfolio.
It was launched on 3 January 1984 with a base of 1,000. There were several reasons for its introduction. With increasing competition from overseas markets, it was considered essential to have a minute-by-minute index which mirrored the movement of UK equities. Also, London's then newly established Traded Options and Financial Futures markets wanted a constantly up-dated index so that products could be developed to allow investors to hedge, or take a view on future market trends, with a single transaction.
Before the introduction of the Footsie there were only two stock market indices. The FT Ordinary Share Index, which had been established in 1935, was considered not to a true representation of the market generally as it has only 30 constituents. It is an unweighted geometric index which, while curbing the effect of dramatic price movements, has a bias to downward turns over time. Furthermore it was then calculated only each hour. The broader-based FT All-Share was published only once a day.
It was therefore decided to start afresh. An index with 100 constituents was chosen simply because a larger number would make quick calculations difficult, while a smaller one would not provide an accurate measure of the market's performance. The companies are selected by their market capitalisation, which is simply the total number of shares they have issued multiplied by their price in the market. The Footsie is an index of Britain's 100 largest companies.
Those selected account for just over 70 per cent of the total value of UK shares. However, for various reasons, some companies may be excluded from the index. This may be because the company is considered to be resident overseas for tax purposes, it is a subsidiary of a company already in the index or it has a large static shareholding.
Technically, the Footsie is a weighted arithmetic index which means that a change in price is weighted by the issued share capital of the company. Consequently, a 10 per cent movement in the shares of the smallest company in the index has less weight than a 10 per cent movement in the price of shares of the company which has the largest market capitalisation.
Values of companies of course are constantly changing. However, changes to the list of members of the Footsie are kept to a minimum. Normally a company will be removed only if it has fallen below 110 in its market value ranking. Nevertheless, by the time the index celebrated its 10th birthday, 42 companies had been removed from the original list. Of those 23 had failed to keep pace with the market and had shrunk in comparison with their peers; 17 were taken over or merged, while Ferranti and British & Commonwealth went bust.
Of course, 42 had joined during the same period - 17 as the result of privatisations. The first change took place in January 1984 when CJ Rothschild replaced Eagle Star. The latest occurred in December 1996 when Mercury Asset Management and Hays were added and Courtaulds and Pilkington were removed. Some companies have come, gone and returned. For example, Tate & Lyle was added in January 1991, removed in September 1993 and reinstated in March 1995.
A steering committee keeps the index under regular reviewn