CAC-40: Capitalization-Weighted Index of 40 Major Shares on Paris Bourse

An overview of the CAC-40, a capitalization-weighted price index of the 40 most actively traded shares on the Paris Bourse. This entry explores its structure, significance, historical context, and comparisons with other indices like the Dow Jones Industrial Average (DJIA).

The CAC-40, or C ompagnie des A gents de C hange, is a capitalization-weighted price index representing the 40 most actively traded shares on the Paris Bourse. It serves as a benchmark index for the French stock market, reflecting the performance of the largest and most significant companies listed in France.

Structure and Calculation

Capitalization-Weighted Index

The CAC-40 is a capitalization-weighted index, meaning each stock in the index is weighted according to its market capitalization:

$$ \text{Index Value} = \frac{\sum_{i=1}^{40} \text{Price of Stock}_i \times \text{Number of Shares}_i}{\text{Divisor}} $$

The divisor is periodically adjusted to ensure the index’s continuity whenever there is a change in the constituents.

Components and Selection Criteria

The index includes companies from a wide range of industries, such as financial services, consumer goods, and industrials. The selection is based on market capitalization and trading volume, ensuring that the most influential and liquid shares are represented.

Historical Context

Origin

The CAC-40 index, officially launched on December 31, 1987, replaced the earlier SBF 120 index as the main indicator of the French stock market. Its base value was set to 1,000 points at that time.

Evolution

Over the decades, the CAC-40 has undergone numerous changes reflecting the dynamic nature of the global economy and the French market. Noteworthy events impacting the index include mergers, acquisitions, and the occasional financial crisis.

Comparison with Dow Jones Industrial Average (DJIA)

Structural Differences

While the CAC-40 is a capitalization-weighted index, the DJIA is a price-weighted index:

$$ \text{DJIA} = \frac{\sum_{i=1}^{30} \text{Price of Stock}_i}{\text{Divisor}} $$

This means that changes in higher-priced stocks have a more significant impact on the DJIA compared to the CAC-40.

Geographic and Sectoral Composition

The CAC-40 represents the French market, while the DJIA encapsulates major American industrial sectors. This makes the CAC-40 more regionally focused and the DJIA more broad-based in terms of economic representation.

Applicability and Significance

Benchmarking

Investors use the CAC-40 as a benchmark to evaluate the performance of French investments. Its movements reflect investor sentiment and the economic health of France.

Portfolio Management

Fund managers often track the CAC-40 to strategize their investments, ensuring their portfolios align with the market trends indicated by the index.

Related Terms and Definitions

• Bourse: A European term for stock exchange.
• Market Capitalization: The total market value of a company’s outstanding shares.
• Stock Index: An indicator that shows the performance of a specific group of stocks.
• Blue-Chip Stocks: Companies with a reputation for reliability and financial stability.

FAQs

What companies are part of the CAC-40?

The index includes prominent names such as L’Oréal, TotalEnergies, and LVMH, among others. The exact composition can change over time based on criteria such as market cap and trading volume.

How is the CAC-40 adjusted?

Adjustments occur quarterly to reflect changes in market capitalization and to ensure the index remains up-to-date with market conditions.

Is the CAC-40 a good indicator of the French economy?

Yes, it provides insight into the economic performance and investor sentiment in France, although it represents only the largest companies.

References

1. “CAC-40,” Euronext, [link].
2. “Stock Market Indices,” Investopedia, [link].
3. “History of the CAC-40,” Financial Times, [link].

Summary

The CAC-40 is a key financial indicator for the French stock market, offering insights into the performance of top companies within the Paris Bourse. By understanding its structure, historical context, and comparison to indices like the DJIA, investors and analysts can make informed decisions and better comprehend the economic landscape.