What is the FTSE 100 and how does it work? That's a question that plenty of people ask. After all, the FTSE 100 is quoted on the news and in newspapers on a daily basis but it's never actually explained. So here's an attempt at an explanation:

In the UK, shares in companies are traded on the London Stock Exchange (commonly known as the 'Stock Market'). Traders buy and sell shares on behalf of large corporate institutions and on behalf of small private investors.

The 100 companies that have the largest value on the stock market (that is the largest total value, not the largest price per share) are included in the FTSE 100. The list of 100 companies is updated on a quarterly basis to ensure that it (roughly) contains the largest 100 UK companies at any point in time.

An index is then created using the share prices of these top companies. The index can really be thought of as being representative of the average price of shares in all of the 100 companies. So, when you see it reported in the news that the FTSE 100 has gone up during the day, then what that really means is that, overall, the value of shares across the top companies has moved up that day. The reverse is also true (if the index goes down on a given day).

Since it is only a representative index, the stock market could be 'up' but some individual companies within the index may have seen their share price drop. So what use is the FTSE 100 index?

Well, it really offers little more than a guide to general trends across the stock market as a whole. There are many more specific indices that can be used to look at specific industrial sectors, but the main FTSE 100 index gives a very quick 'at a glance' view of the market's performance on a given day.