Well the precise equation isn't too critical unless you are FTSE or you are setting up a rival index. But the inherent characteristics of the index are important to understand.
But basically, yes, its market cap but with some rules and mulitpliers applied.
Member company's market cap for this purpose is number of shares available to market (not total shares created) x mid-price per share.
Index given notional value of 1000 points when first created. Membership reviewed every 3months.
Total weighting allowed per member is capped so that a mega-bank say or a mega-oil giant can never be allowed to contribute more than x% of the index's points value.
Worth remembering that FTSE100 is a small sample and is dominated by a few sectors which are not representative of UK commerce (listed and otherwise) in total - banks, oil, telecoms, pharmaceuticals. Where are the techs? Where are the vehicle manufacturers?
Also pundits tend to say, as FTSE has risen x% in 1 year, this means the average investment in the stock market would have also risen x%. Not really. Only way to get exactly FTSE100 performance from your portfolio is to not only own shares in all 100 companies, but also in same proportions as FTSE use to calculate index. And to rotate companies in and out according to membership changes every quarter. Whereas most investors will buy more shares in large blue chips than tiny AIM stocks, no private individual can replicate a 100 share portfolio in the FTSE proportions.
But the FTSE100 is based on objective maths, whereas Dow is selection of 30 representative listed US companies made by Wall Street Journal.
The FTSE website used to have massive amounts of calculation rules and protocols available if you want to really delve deeper into this. But it is dull I warn you.
But basically, yes, its market cap but with some rules and mulitpliers applied.
Member company's market cap for this purpose is number of shares available to market (not total shares created) x mid-price per share.
Index given notional value of 1000 points when first created. Membership reviewed every 3months.
Total weighting allowed per member is capped so that a mega-bank say or a mega-oil giant can never be allowed to contribute more than x% of the index's points value.
Worth remembering that FTSE100 is a small sample and is dominated by a few sectors which are not representative of UK commerce (listed and otherwise) in total - banks, oil, telecoms, pharmaceuticals. Where are the techs? Where are the vehicle manufacturers?
Also pundits tend to say, as FTSE has risen x% in 1 year, this means the average investment in the stock market would have also risen x%. Not really. Only way to get exactly FTSE100 performance from your portfolio is to not only own shares in all 100 companies, but also in same proportions as FTSE use to calculate index. And to rotate companies in and out according to membership changes every quarter. Whereas most investors will buy more shares in large blue chips than tiny AIM stocks, no private individual can replicate a 100 share portfolio in the FTSE proportions.
But the FTSE100 is based on objective maths, whereas Dow is selection of 30 representative listed US companies made by Wall Street Journal.
The FTSE website used to have massive amounts of calculation rules and protocols available if you want to really delve deeper into this. But it is dull I warn you.
Hi, thanks for spending the time on an excellent and good information post. 
So it's not total shares in existance that market value is worked out at? So there is two values a company is valued at? The Market value (share price * number of shares on market), and the actual company value? :?:
You've confused me somewhat, because I've always looked at, say, for example, Canary Warf's takeover bid, and looked at the LSE's market value, and seen that the bid is almost exactly what the market cap is, just slightly higher.
Now I'm not sure :cheesy:
This is a reason why I think we should have the same system as the US, Germany, and France where they have the top 30/40 companies making up the main index.
If I wanted to invest in the FTSE100, and only the FTSE 100, a FTSE 100 tracker would be the way to go?
Thanks a lot, mate. Ta.
So it's not total shares in existance that market value is worked out at? So there is two values a company is valued at? The Market value (share price * number of shares on market), and the actual company value? :?:
You've confused me somewhat, because I've always looked at, say, for example, Canary Warf's takeover bid, and looked at the LSE's market value, and seen that the bid is almost exactly what the market cap is, just slightly higher.
Now I'm not sure :cheesy:
That's fine, but don't the top 10 companies still make up 60% of the index's points? So the big 4 (BP, HSBC, Vodafone, GlaxoSK) can still control the market.
This is a reason why I think we should have the same system as the US, Germany, and France where they have the top 30/40 companies making up the main index.
If I wanted to invest in the FTSE100, and only the FTSE 100, a FTSE 100 tracker would be the way to go?
Thanks a lot, mate. Ta.
