The FTSE 100 is an index of the stocks with the highest market capitalization listed in the UK. Within the index is a broad range of different type of companies. Given the mix of stocks and the different attributes, here are some of the different ways I’m trying to make money this year from the index.
Initial public offerings
The first way I can make money is by investing in new stocks that go public. I don’t want to focus on small offerings that might be listed on the AIM market. I personally feel these carry a very high level of risk. Even though IPOs in general are risky, they can offer potentially great entry prices for long-term holdings.
There are some companies that might go public this year with valuations in the billions, that could sit in the FTSE 100. These include Revolut, Arm Holdings, and EG Group. If I invest when the stock first goes public, I could make money from the share price appreciation.
IPOs are usually offered at a slight discount to the fair value to encourage buyers to begin with. Further, a stock that goes public benefits from the injection of funding, helping to support further growth.
The risk here is that some listings fall flat on their face. A case in point here is the Aston Martin IPO. The current share price is over 90% less than the initial public offering price.
Picking up dividend income
The second way I could make money from the FTSE 100 this year is by picking up dividends. The current FTSE 100 average dividend yield is 3.66%. By owning a collection of dividend stocks, I could pick up passive income from holding.
If I focus more on high yielding shares, I think I could find myself with a yield in the 5%-8% bucket quite comfortably. This higher tier would not only allow me to make money this year, but it also acts as a buffer against inflation.
For example, if I invest £1,000 and have a dividend yield of 7%, it can offset the erosion of my capital if I left it as cash funds. I accept that inflation is currently running at 9%, so I’d still be losing some ground. Yet I’d rather only be down a couple of percent instead of dealing with the full impact of inflation.
I also have to keep in mind that dividends are never guaranteed and can be cut at any time.
Buying ahead of earnings
The final point I’m putting into practice is buying stocks that I think could outperform in upcoming half-year earnings. To be clear, I’m not trying to buy a FTSE 100 share the day before the report and then sell it the next day if it shoots higher. Rather, I’m going to buy with the expectation that positive results can kick start a broader rally that could last beyond this year.
For example, Cineworld is reporting the mid-year results in early August. I haven’t seen any trading updates recently, but am expecting strong figures based on high grossing films and no operational restrictions.
If I think the market is currently overly pessimistic on a company, there could be a good opportunity for me to buy ahead of the information release.