The CAC-40 is a French stock market index that tracks the performance of the 40 largest French companies trading on the Euronext Paris. This article will explore how the CAC-40 is made up, how it works, who its biggest players are and what investors can glean from watching it. Importantly, we’ll also look at how you can start day trading on the CAC-40.
What is the CAC-40?
The CAC-40, which stands for Cotation Assistée en Continu (Continually Assisted Quotation), was first formed in 1987 and runs from the Paris Bourse in the Palais Brogniart.
Since 2000 it has been operated by Euronext; a huge stock exchange operator also responsible for the benchmark indices of Amsterdam, Brussels, Dublin and Lisbon. It operates from 09:00 to 17:35 on trading days, with values calculated every 15 seconds.
The CAC-40 represents the 40 largest French, or qualifying, companies according to free float adjusted market capitalisation (more on this later) and its make-up is reviewed quarterly.
The CAC Family of Indices
The CAC-40 is the head of a larger family of French market indices. Below it is the CAC Next 20, which represents the next 20 largest French companies by market cap.
The CAC Large 60 combines both of these, whilst the CAC Mid 60 lists the next 60 biggest companies that don’t qualify for the Large 60. Both the Large and Mid 60 indices are then combined to make the SBF-120.
Any French companies in the index universe that don’t qualify for these are included in the CAC Small. The CAC Mid 60 and Small indices are joined together in the CAC Mid & Small. Finally, the CAC All-Tradable draws all of the above together into one index.
There are some variations of the CAC-40 index that are calculated in different ways and for different purposes. These include:
The CAC-40 EW is an equally weighted version of the CAC-40, introduced in 2009. The component companies are the same as the parent index, but they are all afforded a weight of approximately 2.6%.
The CAC-40 EXT is calculated on the basis of future contracts traded on the Euronext Exchange.
What is the CAC-40 Used For?
You can see from the amount of CAC indices that when we’re looking at the CAC-40, we’re looking at the premier league of French stocks. In fact, the CAC-40 accounts for over 80% of the total market cap value of the CAC All-Tradable. It’s, therefore, a good gauge of how the whole French economy is performing.
When you consider that France accounts for one-fifth of the total European economy, that its operator Euronext is the largest stock exchange in Europe and that French companies account for nearly two-thirds of the Euronext 100 index; then its significance as a barometer for the wider European economy’s health also becomes clear.
How The Index Works
The constitution of the CAC-40 is based on several factors. The most important of these are:
Whether the company qualifies to be considered
The free float adjusted market capitalisation of qualifying companies
Free float adjusted annual velocity
Let’s look at each of these in turn:
Although it’s the benchmark French index, a company doesn’t necessarily have to be French to be included on the CAC-40. The index rules state that to be eligible for selection a company must trade in Euros and have Euronext Paris as its reference market – although it can still be featured if it has a different reference market but fulfils other criteria, such as significant trading presence in France. This is why there are currently two multinationals in the CAC-40 which list Euronext Amsterdam as their reference market.
Free Float Adjusted Market Capitalisation
Since 2003, companies eligible for the CAC-40 have been selected according to their free float adjusted market capitalisation. At its most basic, this means the market value of all of a company’s outstanding shares. These are all the shares issued by a company, including those owned by company insiders, CEOs or directors, or subsidiary holding companies.
To work out a company’s market capitalisation, the following formula is used:
Company’s share price x number of outstanding shares
The free float factor then redefines the outstanding shares by subtracting any restricted or closely-held shares; therefore, only taking into account shares that are theoretically tradable on the market (any shares not quoted in Euros are also excluded).
This changes the equation to the following:
Company’s share price x (number of outstanding shares – closely-held/restricted shares)
Another feature of the CAC-40 is that it is a weighted index, which is capped at 15%. This means that each of the 40 companies accounts for a percentage of the index, but cannot account for more than 15% of the total.
The theory behind such a cap is that it stops the performance of one company having too great a bearing on the CAC-40’s performance.
A company’s CAC-40 weighting is calculated by dividing its free float market capitalisation by the total market capitalisation of the whole index. At present, the largest company on the CAC-40 has a weighting of just over 10%.
Free Float Adjusted Annual Velocity
Component companies of the CAC-40 must have an annual velocity of at least 20%. In basic terms, this means that a company must be trading a certain number of its outstanding shares at a certain rate. In this case, the velocity is found by dividing the number of shares sold by the number of free float adjusted outstanding shares listed.
This is calculated daily and added up over the course of a year to find the annual velocity.
The make-up of the top 40 list is reviewed quarterly on the third Friday of every March, June, September and December.
Reviews are conducted by the Conseil Scientifique, an independent supervisory body which monitors the index, and Euronext’s Index Team. September also counts as the annual review, when the number of shares included in the index and the free float factor are updated.
Changes to the make-up index can be made at these reviews. Using the criteria described above, the Conseil Scientifique and Index Team look at the performance of the component companies, with the latter making recommendations to the former about any changes that should be made.
There is an element of fluidity to the composition of the CAC-40 in that it employs a buffer zone. In reality, only 35 companies are guaranteed components of the index. The companies ranked 36th to 45th form a ‘buffer zone’, which allows for companies to move in and out of the top list depending on their performance. Companies that are already constituents of the index are given priority over those ranked outside the top 40.
As well as tracking the performance of stocks, the CAC-40 itself also acts as an underlying for structured products, futures, options, funds and exchange traded funds (ETFs).
- It only trades in euros.
- You can trade futures contracts on this market from 06:01 to 19:59 GMT, Monday-Friday.
- All CAC indices are measured in index points that move in increments of 0.5.
- The free float factor used in calculating a company’s market cap is rounded to the nearest multiple of 5%.
- The full market capitalisation of the CAC-40 is currently €1627.1 billion. The free float adjusted total is €1195.7 billion.
- Prior to 2003, it was weighted using total market capitalisation. It switched to the free float adjusted method to stay in line with other major indices.
- When the CAC-40 was first formed in December 1987, its base rate was 1000.
- The highest rate was achieved during the dot-com boom, closing at 6922.33 on 4th September 2000. The same day, it had reached an even larger intraday high of 6944.77.
- Its lowest rate was back in 1988, when it dropped to 893.82.
The performance of any stock market depends on many factors, and the CAC-40 is no exception. As we’ve seen, the CAC is a benchmark index not just for the French economy but also an indicator of the wider European economy. Among the factors that can affect the overall performance of an index are a nation’s GDP, employment and unemployment figures, political events such as general elections, interest rates etc.
Such an example occurred in 2017 when the index hit a nine-year high in response to the news that the pro-European Emmanuel Macron was likely to become French president, as opposed to a more radical Eurosceptic candidate.
With Paris just over 200 miles away from London, the CAC-40 has not been immune to the upheaval caused by the on-going Brexit saga. That said, despite a large drop immediately after the vote in June 2016, and more recent jitters, the CAC-40 has generally tended towards a bullish, or upward, trend.
Overall, the French markets seems to be keeping in line with other major indices by shrugging off any uncertainty both in the UK and the rest of the Eurozone. One reason for this current buoyancy is the strength of the Chinese economy.
There are different ways to look at who the biggest players in the CAC-40 are. If we go by the market weight of a sole company then Total, one of the world’s largest oil companies, is by far the biggest player, holding a market weight of 10.48% (by contrast, the next largest companies hold a weight of 7.62%).
Of the 18 sectors currently represented in the entire index, the two largest are Personal & Household Goods and Industrial Goods & Services, with sector weights of just under 14% each. The largest companies in these sectors include household names such as Airbus and L’Oreal as well as LVMH; a conglomerate formed by the merger of aspirational brands Louis Vuitton, Moet & Chandon and Hennessy.
Although Total are, by far, the largest company on the index – they account for the whole of the Oil & Gas, the CAC 40’s third largest sector – the rest of the top ten companies, including the three mentioned above, Sanofi, Air Liquide, BNP Paribas, Danone, AXA and Vinci account for well over half of the total weighting, and, therefore, a sizeable portion of the whole French index universe.
How to Start Trading on the CAC-40
There are plenty of options for you to begin trading on the CAC-40, but there are also things to consider first. Any stock market is a complex, high-risk investment situation. If you’re not familiar with issues such as French domestic politics or business news, then it would be advisable to consider whether this is the stock market for you. If you’re willing to take an active interest in areas such as those discussed above in Performance Points, then the next step is to find a suitable broker.
Choosing the Right Stock
Volume is the best indicator when deciding the right stock to open a position on, or the right time to close an existing position. Volume is the amount of shares that have been traded. Each transaction is only counted once (so if A sells 10 shares to B, the volume is 10, not 20 because A sold to B and B bought from A). Price movements based on higher volumes are more robust than those on low volumes.
Volatility and Beta
Volatility is an important measure of how stable a stock’s price is. One way of measuring comparative volatility is beta. The Beta formula compares the volatility of the index, to that of a given stock.
Read more about these values on the trading strategy pages.
As well as trading on the CAC-40, investors can also trade with the CAC-40. Many brokers offer products which use the total value of the index as an underlying. One example of this is an Exchange-Traded Fund (ETF).
Exchange-Traded Funds (ETFs)
An ETF is a basket of securities that tracks an index – in this case the CAC-40. ETFs can consist of all kinds of different securities but, for simplicity’s sake, we’ll imagine that we’ve bought an ETF that contains shares in every constituent Ibovespa stock. The value of our ETF will go up or down in relation to the value of the underlying index over the day’s trading.
One major advantage of ETFs is that they generally tend to be low-commission purchases and are cheaper than buying all the constituent stocks yourself. A worry about them is that the demand for them artificially inflates the value of indices, causing price bubbles to form and burst.
CAC-40 Live Price Chart
As an index that reflects not just the French economy, but a sizeable percentage of the Eurozone economy, the CAC-40 is an index with plenty of potential for investment. The trading strategies outlined above can all be used to your advantage when trading on or with the index.
However, as with any investment, you should ensure that you have a firm grasp of both trading and the domestic situation in France before putting your money down.