“What is the difference between the FTSE 100 and FTSE 250? Ben Barlow explains and covers possible trends and investment opportunities that we could see in 2017″
The FTSE 100 is an index of the biggest 100 companies listed on the UK Stock Exchange. These companies are referred to as ‘blue chip’ companies and the index is valued around £1.9 trillion. The FTSE 100, sometimes referred to as the ‘footsie’, hit a low point of 5,923 following the UK referendum last June, but it’s currently valued at 7,243.
The FTSE 250 is made up of the next 250 largest companies trading on the UK Stock Exchange. Analysts sometimes refer to this index as the ‘Mid-Caps’. Companies listed on the FSTE 250 are collectively worth around £390 Billion. The FTSE 250 also tanked in the aftermath of the EU referendum, hitting a value of 14,967 on June 27, but it recovered and is 18,588 today.
These values are calculated using the value of shares of each company listed and the index value. When the index value falls, it’s because share prices have dropped, and vice versa. Both financial indices are influenced to a degree by external factors such as the UK and global economies, political events, and environmental disasters. However, the FTSE 100 is less susceptible to investor sentiment.
Trends in the FTSE 100 and 250
The FTSE 100 is made up of companies whose operations take place well beyond UK borders. Companies like Royal Dutch Shell and BP are global operations, so events like Brexit cause very few ripples on their balance sheet. According to Credit Suisse, the top 100 companies listed on the Stock Exchange make 75% of their money overseas. A low pound boosts their earnings, which in turn boosts the value of the FTSE 100.
It’s a different story on the FTSE 250. Companies traded on this index tend to be smaller, so they are more vulnerable to UK politics and economics. You will find some of the larger construction companies, house builders, and banks listed on the FTSE 250 index. Many of them have suffered in the aftermath of Brexit, and some of them have been forced to issue profit warnings. A falling pound and rising inflation hits these companies hard, which in turns sees the FTSE 250 value sliding.
Looking Ahead into 2017
The FTSE 250 has seen far greater gains over the last five years than the FTSE 100, but just because it offers greater growth potential, this doesn’t mean it’s a better choice for investors. The FTSE 100 has a lower risk profile, so with Brexit causing much uncertainty for the year ahead, the FTSE 100 could be a safer bet for investors. However, in the long term, the FTSE 250 is likely to outperform the 100, as companies listed here will benefit if and when the economy grows post-Brexit. There is also a good chance that the pound will make significant gains against the Euro, which will slow down the FTSE 100.