What Is CAC 40, and Should I Invest in It?
CAC 40 is one of the stock market indices you’ll always see included in business news round-ups. It represents the overall performance and the economic health of Europe and France in particular.
When it officially launched in 1988, when it coincidentally was registered at an all-time low. An all-time high was recorded in September 2000. But what about the CAC 40 index now, and is it worth investing? Let's explore what purposes this index serves, how it is calculated, and what trading strategies can yield good profits.
What Is CAC 40 Index?
CAC 40 is a free-float capitalization-weighted index. It quotes 40 of the largest and most actively traded shares in France and is considered a measure of the economy and the Paris stock market. It is similar to what Dow Jones represents for the USA, FTSE 100 – for the UK, Nikkei 225 – for Japan, etc.
Originally, the acronym “CAC” meant “Compagnie des Agents de Change”. It was a group of brokers that operated the Paris Stock Exchange since at least the 16th century. The initial sentiment was transformed, but the acronym stayed.
Companies within the CAC 40 composition account for about 20% of market capitalization in Europe, which shows how influential it is. It is also tightly connected to the Euro Stoxx 50 index, where they have almost 20 companies in common. CAC often catches the attention of international investors, with almost half of CAC 40 shares are held by non-residents and a quarter – by investors outside of Eurozone.
What Are CAC 40 Companies?
CAC 40 represents various industries within the French economy. Some sectors include personal products, pharmaceuticals, banking, industrial materials, telecommunications, publishing, media and entertainment, chemicals, and a lot more.
The composition of the index is reviewed multiple times a year by the Conseil Scientifique. They study market capitalization and turnover of constituent companies. They make their selection after the close of the third Friday of March, June, September, and December.
|LVMH||Clothing and Accessories||5,9|
|Total||Integrated Oil and Gas||9,44|
|Hermès||Clothing and Accessories||1,58|
|Safran||Aerospace and Defense||3,36|
|Axa||Full Line Insurance||3,62|
It is not uncommon for companies to be taken away from the list. Here are some criteria companies need to meet in order to be admitted to the CAC 40 listing:
- Euronext Paris as a market of reference;
- Significant activities and presence in the French economy;
- Members of staff and/or headquarters located in France;
- Sizable trading volumes.
Factors Influencing CAC on the Stock Exchange
The key factor you need to understand about CAC 40 is that it relies on the French economic activity as a whole. In addition to that, there are multiple accompanying influences that affect its price and general market sentiment. To make the right decisions, you should stay informed on:
- National events (GDP, the employment and unemployment rates, trade balance
- Global events (international politics, related indices, Eurozone governance);
- Performances of quoted companies (capitalization, turnover, etc.);
- Major changes in the companies structure and their policies.
These days, you can find hundreds of assets that you can trade with. Below are some arguments in favor of the CAC 40 Index:
Advantages and Disadvantages of the CAC Index
- Indices are more liquid than equities.
- CAC 40 traders are exposed to lower risks because it is made up of several stocks.
- France remains one of the leading economies in Europe, so it makes sense to invest in French indices.
- It is easier to keep track of one index rather than many individual companies.
There is no such thing as a perfect trading asset. So, for transparency reasons, let’s take a look at the downsides of CAC 40:
- You have no control over individual index components.
- This index does not provide exposure to smaller-cap companies.
- Index price calculation is not always fair.
CAC 40 CFD Trading
As a trader, you cannot buy indexes, including CAC 40, because they are just benchmarks. However, it doesn’t mean it is unfit for trading at all – this is where you should go for CFDs. There are many perks to using this particular instrument, and you will see why.
What Is CFD Trading?
CFD stands for contract for difference and acts as a form of derivative trading. In recent years, CFDs have become a popular method for online investing. It can be applied to indices, commodities, currencies, and stocks.
When you work with CFDs, you are not actually purchasing an underlying asset directly. Instead, you engage in a contract with a CFD broker and buy/sell a number of units for a particular financial instrument. It doesn't matter where the market goes – CFDs are suitable when you expect prices to go up or down.
Advantages and Disadvantages of CFD CAC 40
- If you are interested in working with CAC 40, it makes sense to enter the market using CFDs. With CFDs, you can:
- Use CFDs as a quicker and more accessible medium for trading;
- Gain greater exposure with less capital by using leverage;
- Take advantage of all market movements;
- Save money from stamp duty exemption.
At the same time, you should not overlook some downsides associated with this technique:
- There are additional risks when trading with leverage;
- You still have to pay fees: spread, holding costs, and commission.
CAC 40 CFD Trading Strategies
When you trade CAC 40 with CFDs, you can use leverage to increase gains in a relatively small amount of time. That said, you can only do so if you pick the right strategy. You can employ regular strategies, but remember to take into account specific characteristics of CFDs. Here is how you behave during:
Bullish market – Even during rising markets, prices inevitably go through occasional consolidation or retracement periods. Try a swing trading to benefit from these small reversals and get maximum returns, Bearish market – Since CFDs allow you to trade in all directions, you can go short when prices are falling. So, even in tumultuous periods, you can profit from buy-in in terms of CFDs.
Takeaway on the CAC French Stock Index
CAC 40 is a great asset to diversify your portfolio. It exposes to a variety of the most prominent French companies and provides decent, reliable profits (when done right). It suits all kinds of traders – you can trade as much or as little as you want.
Obviously, before you are ready to enter the real market, you need to learn the basics. At Libertex, we offer a wide range of resources to build your trading skills. Sign up for a free demo account to ensure you will be managing your future CFD portfolio properly.
What does CAC 40 stand for?
CAC 40 is short for Cotation Assistée en Continu, which means Continuous Assisted Quotation. Initially, it was formed as an early automation system for the France's securities market. Since then, it transformed into an index representing 40 most significant stocks on Euronext Paris.
What are CAC 40 companies?
CAC 40 is comprised of 40 companies with the largest equities that are publicly traded on the Euronext Paris. These are the biggest and most valuable companies by market capitalization on this exchange – for example, LVMH, L'Oréal, Total, and Airbus.
Why does the CAC 40 index matter?
France is Europe's second-largest market, so CAC 40 acts as a barometer for the wider European economy's health. It gives investors and the public at large an idea of where the general market is heading.
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