How Do Stocks Join and Leave The FTSE 100 Index?

The FTSE 100 index is used as the benchmark forFast Entry
measuring the strength of the UK stockmarket, andThe second way a company can enter the FTSE 100
some commentators have argued it has a natural biasindex is if it is a new issue and larger than 1% of the
to outperform the wider FT All Share index, because itfull market capitalisation of the FTSE All-Share Index. In
tends to promote to its ranks those stocks which arethis case it will normally be included in the top 100 after
in the ascendancy and remove others that are fallingclose on the first day of trading, and the lowest ranking
away.constituent is removed.
From time to time the index can appear to beEligibility of equities
affected by a high weighting given to one particularOnly the eligible quoted equity capital is included in the
sector, and it could be argued that at present thecalculation of its market capitalisation, so if a company
mining sector (Anglo American, Antofagasta, BHPhas two or more classes of equity, significant and liquid
Billiton, Kazakhmys, Lonmin, Rio Tinto, Vedantasecondary lines are included in the calculation of the
Resources and Xstrata) has undue influence.market capitalisation of the company, based on the
Stockmarket traders will recall the famous andmarket price of that secondary line.
dramatic year of 2000 when the FTSE 100 listThe committee can decide if a secondary line is to be
contained such passing technology stars such aspriced separately if its full market capitalisation (before
Energis, Bookham Technology, Arm Holdings,the application of any investibility weightings) is more
Freeserve, Baltimore and Psion - great memories!than 25% of the full market capitalisation. If the full
Given the increasing use of tracker funds, it ismarket capitalisation of a secondary line, which is
important to look at where sector and stock moniesalready a constituent of the Index, falls below 20% of
are flowing, because these fund managers have tothe company's main line at the quarterly review, the
match whatever is in each benchmark index, so newsecondary line will be deleted from the index, but this
entries and deletions are worth researching by CFDhappens rarely.
traders before they happen.Convertible preference shares and loan stocks are
The purpose of this paper is not to discuss whether orexcluded until converted.
not it is worth buying or selling a new constituent, asRights or other issues
significant academic studies (with some conflictingIf a company issues shares, partly or nil paid, and the
results) have been made on this subject. It is more acall dates are already determined and known, the
summary of what changes to look for in assessingmarket capitalisation is adjusted so as to include all
possible constituent moves, and there are varioussuch calls, which would reflect the total fully shares in
ways that the FTSE 100 list can be changed.issue.
Quarterly reviewsMergers and takeovers
This is the most common way for changes to beIf a merger or takeover results in one constituent in the
lagged. The committee that oversees the variousFTSE 100 index (or FTSE 250 for that matter) to be
FTSE indices meets quarterly on the Wednesdayabsorbed by another constituent, there is a vacancy in
after the first Friday in March, June, September andthe appropriate index. The highest ranking security in
December. Constituent changes are then implementedthe appropriate Reserve List as at the close of the
on the next trading day following the expiry of theindex calculation two days prior to the deletion is
LIFFE futures and options contracts, which normallychosen.
takes place on the third Friday of the same month.If a constituent company in the FTSE 100 or FTSE
The rankings of constituents by value are calculated250 is taken over by a non-constituent company, the
using close of business prices on the day before theoriginal constituent will be removed and replaced by
review, and companies must have a minimum tradingthe highest ranking non-constituent on the appropriate
record of 20 days at the review.Reserve List.
A company is promoted to the FTSE 100 index if itThe company resulting from the takeover is however
rises to 90th or above when the eligible securities areeligible to become the replacement company if it is
ranked by market valueranked higher than any other company on the
It is relegated if it falls to 111th or below.Reserve List.
Where there are more companies qualify to beCompany splits or demergers
inserted in an index than those qualifying to be deleted,If a member of the index is split or demerged into two
the current lowest ranking constituents are relegatedor more companies, the resulting companies are eligible
to ensure there are always 100 companies in thefor inclusion as index constituents in their own right. This
index. If there are more qualifiers for relegation, theis again based on each new company's market
highest ranking companies that are not already in thecapitalisation (before the application of any investibility
index will be promoted to match the numbers.weightings).
The six highest ranking non-constituents of the FTSEIt may be that the lowest ranking FTSE 100 constituent
100 Index at the time of the periodic review are knowngets relegated to the FTSE 250, so when GUS
as the reserve list, and are used in the event that onedemerged into Home Retail and Experian last October,
or more constituents are deleted from the FTSE 100Party Gaming was unfortunately relegated.
during the period up to the next quarterly review.