In this article, we shall educate you on the concept and application of a famous French stock market index called the CAC 40.
What is the CAC 40?
The CAC 40 is a stock market index used by investors and traders in France. This French stock market index measures the top 40 companies in the country by market capitalization measured by Euronext Paris. Starting with a base value of a thousand, the CAC 40 has been operating on a total market capitalization basis till 2003 before switching to a free float-adjusted market capitalization methodology. Investors consider the CAC 40 the benchmark stock index for publicly listed firms on the Euronext Paris.
So, how are these forty companies chosen for the CAC 40 index? CAC ranks French publicly traded firms based on market capitalization, trading activity, balance sheet size, cash flow, and liquidity. The popularity of the CAC 40 index stems from the worth of the forty listed companies.
Understanding the CAC 40
Being a French stock index, the CAC 40 is an abbreviation of a trading method in French. The full form for the CAC 40 is “Cotation Assistée en Continue”, which translates to “continuous aided trading” in English.
Besides being the go-to index for traders in the French stock market, the CAC stock exchange index offers insights into the movement of Euronext Paris. For this reason, it is also known as the Paris CAC 40 index.
The CAC 40 represents a capitalization-weighted measure of the 40 most significant values among the 100 highest market caps on the exchange. It is similar to the Dow Jones Industrial Average (DJIA), where both these indices are used widely for illustrating the general level and trend of the French stock market.
Like most indices, the CAC 40 index is regulated and checked over time. The index is thoroughly evaluated every three months by an independent steering group. The committee ranks firms listed on Euronext Paris at each review date based on share turnover and free float market capitalization from the prior year. A firm may have more than one class of shares listed on the stock market; however, only the most regularly exchanged of these will be allowed into the index.
Note! L’Oreal, Renault, Carrefour, Orange, and Michelin are some of the firms among the 40 most liquid stocks traded on the Euronext Paris that make up the CAC 40 index.
Impact of the CAC 40
The CAC 40 has been influential beyond the French financial markets as well. Traders use it for stock markets non-native to France. Euronext’s cross-border European stock market uses the CAC 40 as one of its primary national indices. Amsterdam, Brussels, and Paris stock markets were combined to form Euronext in 2000. The merger between Euronext and the New York Stock Exchange (NYSE) Group was finalized in 2007, creating NYSE Euronext.
Now, Euronext is itself a mighty market within Europe. Think of this: around six separate nations’ worth of exchanges is managed by Euronext. The business runs the largest liquid exchange group in the world, with roughly 4,000 listed companies and a market valuation of about thirty trillion USD.
The CAC 40 is also impactful as it incorporates market capitalization into its calculations and rankings. Market capitalization is the entire dollar market value of a company’s outstanding shares. Rather than utilizing revenue or total asset data, the investing community employs this number to estimate a company’s size. Market capitalization may be a helpful statistic in deciding which stocks you are interested in and how to diversify your portfolio with firms of various sizes due to its simplicity and efficacy for risk assessment.
Trading the CAC 40
The top three exchange-traded funds (ETFs) that follow the CAC 40 are:
- Lyxor ETF CAC 40 (CAC).
- EasyETF CAC 40 (E40).
- Amundi ETF CAC 40 (C40).
The bottom line
So, the global coverage of the companies included in the CAC 40 makes it the most famous European index for foreign investors. However, you should always be aware of the risks of investing and understand whether the companies are reliable or not, and indices like CAC 40 are very helpful in this.