As one of the most popular stock indexes in the UK, you might be wondering how to invest in FTSE 100.
There are lots of different ways to invest in the FTSE 100 index with some of the largest UK stocks and shares to buy, each with its own benefits, so read on to find out how.
4 steps on how to invest in FTSE 100
- Decide on a investment platform like Interactive Investor or eToro to open your share dealing account with. Make sure you choose an FCA regulated broker.
- Sign up to your share dealing account and deposit money, ready for investment. You can typically deposit money using a credit or debit card.
- Choose how you want to invest in the FTSE 100 – in either exchange-traded funds (ETFs), index tracker funds or individual company shares.
- Start investing in your chosen area.
Before we look at what the FTSE 100 is, here is a more detailed view on how to invest in FTSE 100.
1. Decide on the share dealing account platform that best suits your needs
There are many different stockbrokers and platforms that will allow you to invest in the FTSE 100. So, you may want to shop around and compare the different trading platforms.
For example, if you want to invest in ETFs, index tracker funds or just individual company shares, these can be traded similarly to normal shares on most trading platforms.
You may even be able to trade these using a Stocks and Shares ISA or a self-invested personal pension (SIPP).
Of course, the platform you choose entirely depends on your preferences too. Maybe you would prefer a share dealing platform with a user-friendly interface, or maybe you would prefer one that offers educational material so you can inform yourself on better ways to trade?
It is also worth checking the fee structure of different platforms. For example, some may require a monthly flat fee, whereas some might ask for a percentage of how much you hold.
Which stock dealing account provider is the best?
When it comes to investing in FTSE 100 ETFs, index tracker funds or individual stocks, you have a wide choice.
- Minimum deposit £50
- 0% commission when you buy and sell stocks
- One of the best investment apps in the UK for beginners and low-cost trading
A good platform for investing in the FTSE 100 is eToro. They offer a varied selection of ETFs, index tracker funds and individual company shares.
If you aren’t a confident investor, this may be where you want to open an account – they have a practice mode in which you can invest virtual money and get a feel for the markets.
They also have a social investing feature that allows you to mirror the investments of top-performing investors.
Fees on eToro are relatively low too. It’s free to open an account, there are no management fees, and there’s 0% commission on trading stocks or funds.
There is an inactivity charge, however, which means if you don’t log in after a year you will be charged $10 a month for every month you don’t log in.
There is also a withdrawal fee of $5 and a variable fee for converting currencies. eToro works in US dollars, so conversions may be common. For this reason, you should ideally calculate how much you will be charged for conversions before you carry them out.
Your capital is at risk. Other fees apply. For more information, visit etoro.com/trading/fees.
- Minimum deposit £0
- Fees – £9.99 a month + £7.99 per trade
- Good investment app for DIY Investors
They do come with a cost, however, as you’ll pay a flat fee of £9.99 a month. This flat fee means you have access to their regular trading service, which requires you to deposit at least £25 a month, but has no trading fees and gives you up to 25 investments every month.
This flat fee also includes a Stocks and Shares ISA, your trading account, and a Junior ISA. For an extra £10 a month you can also access their SIPP, which could be ideal if you want to build toward your retirement pot while investing in the FTSE 100.
Capital at risk.
- Buy and sell shares at £11.95 per deal online, reducing to just £5.95
- Hargreaves Lansdown is a FTSE 100 company, trusted by over 1.5 million clients
Hargreaves Lansdown offer a trading account that has one of the most complete selections of ETFs in the UK. They also offer a variety of index tracker funds and shares for individual companies listed on the FTSE 100, and better yet, there is no investment limit.
You can even open a fund and share dealing account with as little as £1. You should keep in mind, however, that they charge an annual fee of 0.45% to hold ETFs and any instruments held in their Stocks and Shares ISA.
This means that the more you invest, the more you will be charged, so if you want to invest a large amount it may be worth going for one of the other previously mentioned platforms.
It is also worth noting that while the fund and share account only requires £1 to open, their Stocks and Shares ISA requires a minimum of £100 to open.
As with any investment the value can go down as well as up. Past performance is no indicator of future performance. The tax treatment of ISAs depends on your individual circumstances and may be subject to change in the future.
2. Sign up with your chosen provider and deposit money
Once you have decided which trading platform to use, you should sign up and open an account. Then, you’re ready to deposit your money.
Depending on the provider you decided to go with, some may charge a deposit fee, so you should check this before you deposit to ensure you’re prepared to cover the cost.
Tip: it is sometimes sensible to only deposit the amount of money you intend to invest and not leave any excess money sitting uninvested in your trading account. This is because you may be unlikely to earn any interest on uninvested money with a share dealing account.
3. Choose how you want to invest in the FTSE 100: through ETFs, index tracker funds, or individual shares
When you want to invest in the FTSE 100, there are many different investment options. Three common ones are ETFs, index tracker funds, and individual stocks of the companies listed on the index.
Each has its own set of benefits, so you should decide which method best suits your reasons for investing before you purchase them.
Remember: this is not a personal recommendation to invest using these methods. If you need help with your investment decisions, make sure you seek independent advice.
ETFs are a fund that track the performance of the FTSE 100
Let’s start with ETFs. These funds track the performance of a particular index, commodity, or sector, exclusively holding the shares listed on that underlying index.
In this case, the tracked asset we’re talking about is the FTSE 100.
So, say you have purchased a FTSE 100 ETF from a trading platform. Here, you can think of your money as being spread across the FTSE 100’s constituent companies. That means you gain exposure to all of these different companies.
ETFs act much like regular shares, as they are traded on the same marketplaces and the price fluctuates throughout the day. This gives you the opportunity to generate potential profits by capitalising on price movements.
Due to this, they can be bought with a self-invested personal pension (SIPP) or a Stocks and Shares ISA.
ETFs are also relatively tax-efficient, as you will only be liable for Capital Gains Tax (CGT) if you make a substantial profit when you sell.
When the FTSE 100 value increases, you will typically gain dividend income from your ETF. You can also sell them for a profit when the price increases.
A downside of ETFs is that costs could potentially be higher than trading in individual shares. This is because you may have to pay a management fee for an ETF.
If you would like to read further about ETFs, check out our comprehensive guide to ETFs to discover more details, the different providers available and which would best suit your needs.
Which FTSE 100 ETF is the best to invest in?
There are a few differences between ETFs that you should consider before you decide to invest in one.
As mentioned, you may face varying management fees, but some ETFs may also have a higher “spread” than others.
This represents the difference between the buying and selling price, much like exchanging a foreign currency. The spread is usually around 0.1% to 0.5% depending on the provider, so you should check these before you make the purchase.
It may also be worth checking where the ETF provider is based. While most of the main providers are overseas, if they are based in the UK and trade on the London Stock Exchange, you may be subject to Stamp Duty.
Index tracker funds are similar to ETFs, with slight differences
Index tracker funds are very similar to ETFs, but with a few slight differences.
The price of an index tracker fund is based on the total price of all the securities held within the fund. This is called the net asset value (NAV). Like ETFs, index tracker funds aim to match the growth of the fund they track, in this case, the FTSE 100.
Index tracker funds are also a much more passive form of investing – since they stick to the price of the FTSE 100, they don’t need as much managing by the fund provider, meaning you may face lower administrative costs.
Since index tracker funds aim to stay in line with the performance of the FTSE 100, if the value of the stock index rises, the value of your investment will also rise. As expected, your investment will also decrease in value if the FTSE 100 falls in value.
While ETFs can be traded at any time of the day, an index tracker fund can only be bought or sold for the price set at the end of the day. Due to this, you may prefer ETFs if you like to trade during the day.
You can always buy individual FTSE 100 company shares
Of course, there’s nothing stopping you from just investing in the companies listed on the FTSE 100 directly.
Since these companies are the biggest on the London Stock Exchange (LSE), you could invest directly in them and potentially benefit from decent dividends or sell the shares for a profit at a later date.
For example, the top 10 companies with the largest market capitalisation listed on the FTSE 100 as of 31 March 2022 are:
- HSBC Holdings
- Unilever Group
- Rio Tinto Group
- British American Tobacco
As you can see, even within the top 10 companies, there is a decent spread across many different sectors. This could give you a good guide on potentially well-performing companies to invest in, all while keeping your own portfolio diversified.
Which individual FTSE 100 companies are best to invest in?
This depends on your interests, reasons for investing and what your portfolio already contains.
Once you have opened your share dealing account, you can buy shares and sell shares in any of the FTSE 100 companies. They include household names such as Vodafone, Barclays, Tesco, Lloyds Banking Group and Rolls-Royce.
You may want to buy shares in a range of individual companies or concentrate on a handful of well-known names or sectors.
You ideally want to diversify your portfolio of investments as much as possible. This means thinking about the sectors your money is invested in and trying to create a balance.
This way, should a specific sector (for example, retail) underperform, your other investments may offset this. The phrase “don’t put all your eggs in one basket” comes to mind.
Which is better: individual shares or funds?
There are so many options when it comes to investing in the FTSE 100. You may be asking yourself whether you should be investing in funds or just individual shares?
Well, this really depends on what you want to get out of your investments. Since funds typically cover all the different constituent companies listed in the FTSE 100, they might be better if you’re looking to diversify as much as possible. Funds also tend to be better for those who want to take a backseat and invest more passively.
However, investing in individual company shares could generate faster growth – for example, if a share price rises sharply. However, this is typically a riskier approach as you could also see your investment fall faster if an individual firm’s share price were to fall.
It is for this reason that you may want to consider getting a combination of the two. If you invest in a fund and choose a diverse selection of companies in the FTSE 100 across different sectors, your portfolio may be spread enough to limit the effects of an economic downturn.
4. Invest in your chosen area of the FTSE 100
When your money has been deposited and you have decided on how you want to invest it, you can finally make your investments.
If you want to go for ETFs, index tracker funds or individual shares, you can simply search for the chosen share or fund on your trading account and make the purchase.
Once you have purchased your shares, ETFs or funds, you may want to think about monitoring prices on a regular basis. Your chosen platform is likely to provide you with the data necessary to keep up to date with the FTSE 100’s performance.
How to make money on the FTSE 100
As is the case with most types of investing, one of the ways to make money on the FTSE 100 is to cash in the investment when the price is higher than you paid. Since ETFs and index tracker funds are more suited to long-term holds, you shouldn’t expect to be able to turn a profit immediately.
As mentioned, you should keep track of how the FTSE 100 is performing. It may also be worth keeping up with industry news, especially if you have purchased shares in individual companies. This way, you may be able to identify when you expect the price to rise, or fall, and sell your shares accordingly.
You could also set price alerts on your phone that give you a notification when the FTSE 100 or an individual company has reached a specific price.
The “Yahoo Finance” app for your phone, for example, lets you set these reminders.
Is the FTSE 100 a good investment?
As mentioned, funds in the FTSE 100 tend to be more suited to long-term holds. This is further reflected by the previous performance of the index.
Between 1984 and 2019, the FTSE 100 increased in price by 654%, and a further 1,377% on a total return basis. This equals an average annual price return of 5.8% and an average annual total return of 7.8%.
As you can see by the data, the FTSE 100 does tend to offer decent yearly returns. You should keep in mind, however, that past performance is not a reliable indicator of future performance.
You could also try trading on the FTSE 100, which includes spread betting or CFDs
This is where things tend to get slightly more complicated. Trading on the FTSE 100 usually includes either spread betting or CFDs, which are both forms of derivative trading.
Spread betting involves trying to predict whether the FTSE 100 price will rise or fall
Spread betting, simply put, is a type of derivative trading. You’re basically betting on whether the value of the FTSE 100 will rise or fall.
When you place a spread bet, you stake a certain amount of money for every point the FTSE 100 rises or falls. For example, if you staked £100 for every point, you would gain £200 if the FTSE moved two points in the direction you bet or would lose £200 if it moved against your bet.
CFDs are similar to spread betting, except you will get the difference in value
Like spread betting, “contracts for difference” (CFDs) are also a form of derivative trading.
Rather than betting per point whether the FTSE 100 will rise or fall, as is the case with spread betting, with CFDs you will instead get the difference in price from when you opened the contract.
For example, if you predicted the FTSE 100 would rise, you could buy 20 CFDs for the FTSE 100. If the price rose by 20p you would earn £400. If it fell by 20p, however, you would lose £400.
You should keep in mind that CFDs, spread betting and other types of derivative trading can get extremely complex. Not only does it take in-depth technical analysis and predictions, but your money is also leveraged.
This means that, while your investment gets more exposure to the market and you will earn more if you profit, you will also lose more if the financial markets move the other way.
In fact, more than half of retail investor accounts lose money when trading CFDs, so you should know exactly what you’re getting yourself into before you try derivative trading.
As mentioned, this can be pretty complicated stuff, so read my in-depth guide if you want to find out more about trading CFDs and derivative trading.
What exactly is the FTSE 100?
The FTSE 100 is, simply put, a stock index. This tracks the overall performance of the 100 largest companies by market capitalisation (sometimes referred to as the market cap) that are listed on the London Stock Exchange.
This isn’t just to give you an idea of the best stocks either; it gives investors an indication as to how healthy the UK stock market, and even the UK economy, is.
The market capitalisation of all the companies is reviewed each quarter, and if they meet the requirements, or no longer meet them, they will be changed accordingly.
FAQs about investing in the FTSE 100 index
Should I invest in the FTSE 100?
Like any other type of investing, the FTSE 100 comes with risks. If you’re looking for a longer-term, more passive investment and want to invest in a selection of the UK’s largest companies, investing in the FTSE 100 could be a good choice for you.
What other stock markets can I invest in?
As well as the FTSE 100, you can also invest in the FTSE 250, or the FTSE AllShare (which is made up of the combined companies listed in the FTSE 100, 250 and the SmallCap Index, all of which still track the UK stock market).
There are many different stock market indexes out there that track various different markets around the world. The S&P 500, for example, lists the top 500 companies on the US stock exchange.
Or, if you wanted a wider-scoped stock market index, you could try the MSCI World Index, which is an index of more than 1,500 top companies from around the world.