Best Brokers For Trading The CAC 40 (France 40)

What is the CAC 40 Index?

CAC 40 Index is the main benchmark index of the French stock market. It derived its name from Cotation Assistée en Continu electronic system in the eighties.

Like the Dax index, the index was born in the eighties on December 1987 with a base value of 1,000. The index is now maintained by Euronext Paris.

The index is capitalisation weighted, with the largest forty companies being included in the index. As of 2019, the biggest three stocks in the index is Total, LVMH, and Sanofi (see below). Many of these firms are household names, such as LVMH, L'Oreal and Danone.

CAC 40 Index Component Snapshot

Source: Euronext.com

Can you trade the CAC Index?

Yes, you can. There are multiple financial products derived from the underlying CAC Index that you can trade with, including:

• Index Futures (Euronext)
• Index Options (Euronext)
• Exchange-Traded Funds (GMG Guide on ETFs)
• Spread trading and CFDs

Read the GMG Guide on Index Trading.

One of the biggest ETF based on the CAC 40 Index is the Lyxor CAC 40 ETF traded in the LSE (ticker: CACX). This ETF is gaining popularity because of the ease of trading, unlike futures or options where there are rollover costs and expiry dates.

On index futures, they usually expire on March, June, September, and December. The nearest futures are usually the most liquid.

However, bear in mind that the CAC Index is Euro-denomiated. If you are trading in the UK with, say, spread trading, you may be using sterling depending on the platform.

What is the attraction of French CAC Index?

The French CAC 40 Index is attractive to investors and traders alike because:

• Many CAC stocks are highly international and these companies derived their earnings globally
• CAC 40 offers good liquidity - as some of these stocks are huge (e.g. Total, Sanofi and Airbus) This means tighter spreads.
• CAC 40 offers a good exposure of leading consumer companies such as LVMH, Kering, and Danone.

French firms have benefitted from good economic growth and are expanding rapidly, like LVMH's takeover of Tiffany. As you can see from CAC 40's chart below, prices are marching upwards.

What drives the CAC 40 Index?

Stock markets are often driven by a wide variety of factors. For the French stock market, consumer growth is increasing important because of its exposure to the world consumption trends. Other important factors include:

• Trade factors (e.g., Tariff wars, exchange rate)
• Monetary factors (e.g., Quantitative Easing, rates movements, yield curve etc)
• Technical factors (e.g., new highs or lows)
• Earning factors (e.g., profitability and earnings momentum)

The CAC Index has a large financial component (AXA, BNP, SocGen), so ECB's QE may play an important role too.

Watch the Euro exchange rate as this may impact french exports/imports prices.

Seven-Point Guide on trading the CAC 40

To trade the CAC 40 profitably requires a good trading strategy. The following tips may help you to maximise your chances of trading the CAC 40 successfully over the long term.

1. Understand your requirements for trading the CAC 40. Are you an intra-day or positional trader? Do you invest for the long term? Are dividends important?
2. Research various technical (or fundamental) indicators to support the trading objective. There are many technical indicators that you can use, including
   • Trend indicators like moving average
   • Oscillators
   • Support & resistance levels (see GMG Guide on Support/Resistance)
   • Patterns like breakout and reversals
3. Backtest these indicators if they are profitable over time. Select a few that you can understand. Check their pitfalls and signal variations over time. Put these indicators into a trading software and backtest. Is it profitable? Can you withstand the drawdown?
4. Select the indicators that best suit the objectives. Once the initial backtest research is completed, setup a mock testing period of, say, six weeks. Assess the results. Are they good? Which type of indicators works better?
5. Include risk management factors in your assessment. Important factors like position sizing, leverage levels, stop loss levels and risk-reward ratios must be specified. Trading without risk management is like driving without brakes and safety belts.
6. Select trading platforms that support your operations. Capital requirements, platform fees, and trading capability are all important factors to look for. See the comparison table above.
7. Commit capital and go live. Make sure that you drip feed capital into new strategies because there may be many things to iron out before you're comfortable with it. Stay discipline with your trading plan.