What is the CAC 40 and what does this stock market index represent?
Let us initially examine the major factors of the CAC 40 Index that you should know to be able to analyse this index correctly.
The CAC 40 is a French stock market Index which, as its name suggests, is composed of the top 40 French companies quoted on the Paris Euronext stock market. This index is therefore part of one of the leaders of the European financial marketplaces, Euronext, and alone represents over 80% of the French financial markets.
The companies of which the CAC 40 stock market index is composed are selected from among the top 100 French companies from different activity sectors that represent as objectively as possible the state and the health of the French economy.
From a historical point of view, we would note that the CAC 40 stock market index was created on the 31 December 1987 when its initial quote was for 1,000 points. It was the ‘Compagnie des Agents de Change’, hence the initials CAC, that created this index following the crash of 1987. However since then things have changed. The initials now represent the name ‘Cotation Assistée en Continu’ simply because the rate for this index is updated every 15 seconds during the opening hours from Monday to Friday, 9 a.m. to 5.30 p.m.
Of course, the list of companies represented on the CAC 40 Index changes over time, as with other international stock market indices. Certain companies exit this index and others with a higher stock market capital take their place.
However, certain particularly solid companies have been included in the CAC 40 since it was first created. These are as follows: Accor, Air Liquide, Carrefour, Danone, Lafarge-Holcim, l’Oreal, LVMH, Michelin, Saint Gobain, Sanofi, Société Générale and Vivendi. It should also be noted that since its creation 32 years ago, 94 French companies have at one time or another been included in this index.
How is the CAC 40 stock market index rate calculated?
Understanding the operation of the CAC 40 and its composition is clearly very important but it is also necessary to know how its rate is calculated. This is what we shall now explain.
To understand this method of calculation, it should first be remembered that in December 2003 the CAC 40 adopted a floating stock market capital calculation method that takes into account the number of shares available for purchase on the market by the quoted company. This modified method of calculation aims to be close to that used already for the major international stock market indices.
To summarise, the calculation of the CAC 40 rate is based on the stock market capital of the companies of which it is composed and it is obtained through the multiplication of the number of shares of each company on the market by the price of the shares.
Concerning the management of the CAC 40 index, notably the updates of the assets of which it is composed, it is the scientific Board of the Euronext stock market indices, composed of a number of independent experts of these stock market indices, that is responsible for these revisions and decides therefore which companies enter or exit this index with the aim of providing a fair representation. This board of eight independent experts from universities, industry and analysts meet every three months, on the third Friday in March, June, September, and December. When making their decisions they take into account the transaction volume of the company’s shares, the representation in the activity sectors on a national level, and the fluidity and regular trading of the assets.
Historical evolution of the CAC 40 :
- 1988: This is the year the CAC 40 index was created. In reality, this index was launched on 31 December 1987 following the adoption of the 1984 banking law and in the context of the rise of financial globalisation and after the 1987 crash.
- 2000: That year, the CAC 40 reached an all-time high of 6,944.77 points thanks to the speculative bubble in telecom, media and technology stocks. It then fell with the bursting of this bubble to 2,401.15 points in March 2003.
- 2003: Since 2003, the CAC 40 takes into account the free float in addition to the market capitalisation of the companies that make it up.
- 2008: That year, the CAC 40 fell again, dropping below 4,200 points in July and 3,200 points in October. This was a real stock market crisis. Over the year as a whole, the index experienced the sharpest fall in its history with -42.68%.
- 2011: 2011 was the year of another crash for the CAC 40 index which fell by 28.8% between July and September.
- 2017 : The CAC 40 begins to include new technology stocks such as Atos, STMicroelectronics, Dassault Systèmes and Thales.
- 2019: This year will be marked by a record dividend distribution of more than €49.2 billion and share buybacks of more than €10.7 billion.
- 2020 : With the Covid-19 pandemic, the CAC 40 will record the biggest drop in its history in 2020 with a fall of 12.28% on 12 March. After starting the year at over 6,000 points, it was down to 4,044.26 points at the end of that session. The fall continued towards 3 754.84 points on 18 March, i.e. a total loss of more than 40% of its value in one month. Before the end of the year, however, the index will rebound rapidly with a 20% gain before the end of March and a second 20% rise in November after the announcement of the effectiveness of the first vaccines.
- 2021: At the beginning of 2021, the CAC 40 exceeds its pre-pandemic peak, buoyed by hopes of a recovery, and reaches 6,131.34 points, close to its 2007 record level, thanks in particular to cyclical stocks. It will continue to rise and will approach the 6,800-point level in the summer of 2021. Finally, the psychological threshold of 7,000 points will be crossed in November 2021 and will mark an absolute historical high.
- 2022 : The upward trend of the CAC 40 index continues and a new all-time high is reached on 5 January 2022 at 7,376.37 points at the close and an all-time high at 7,384.86 points during the session. However, a downward correction driven by the war in Ukraine led to a further decline until the low of 5,962.96 points was reached in March 2022.
A technical analysis of the CAC 40 index rate and the indicators to follow:
The second analysis you should use to study the growth possibilities of the CAC 40 index is the technical analysis.
This is based uniquely on the study of this index’s charts and its current and historical rates. To complete a comprehensive technical analysis it is however important to have some understanding of the methodology and principal technical trend and volatility indicators as follows:
The more indicators you use the more pertinent and precise your analyses will be. Of course, for this you should pay careful attention to the charts you use for this analysis and in particular favour those that can be personalised to your requirements. These charts, available from online brokers, will actually enable you to generate different displays of curves, timelines and indicators for a clearer visibility. Then you simply have to interpret the movements that you observe on your monitor to obtain the required signals.
We would nonetheless draw your attention to the fact that this technical analysis should never be used alone, always with an accompanying comprehensive fundamental analysis, whatever the asset you are studying.
The different ways to trade the CAC 40
The CAC 40 is the most important French stock market index, made up of the 40 largest companies listed on the Paris Stock Exchange. Investors can trade the CAC 40 in different ways depending on their objectives, risk level and experience. So let's find out the different ways to trade the CAC 40.
- Stock trading : The most common way to invest in the CAC 40 is to buy shares in the companies listed in the index. Traders buy shares in the hope that the price will rise and that they can sell them at a higher price. Investors may also receive dividends from the companies in which they have invested.
- Futures trading: Futures trading is a method of trading the CAC 40 that allows traders to buy or sell a contract at a future date at a pre-determined price. CAC 40 futures are based on the index itself, which means that traders do not actually own shares in individual companies. Futures trading is considered more of a short-term investment, as traders are generally looking to trade over a period of days or weeks.
- Options trading: Options trading is a method of trading the CAC 40 that gives traders the right, but not the obligation, to buy or sell an underlying asset at a pre-determined price at a future date. Traders can buy call or put options based on their expectations of where the index will go. Options trading is considered a more advanced trading strategy, as traders need to understand basic concepts such as strike prices, life and volatility.
- CFD trading: Contracts for Difference (CFDs) are a financial instrument that allows traders to speculate on the rise or fall of the index. CFDs allow traders to take a long or short position in the index without actually owning the underlying assets. CFDs are considered a short-term investment as they are often used to profit from daily price fluctuations.
- Algorithmic trading: Algorithmic trading, also known as automated trading, is a method of trading the CAC 40 that uses computer algorithms to execute trades. The algorithms are designed to monitor price movements and economic events to make trading decisions in real time. Algorithmic trading is considered a short-term investment, as trades can be executed in milliseconds.