How to invest in the CAC 40 Index
Investing in France’s benchmark CAC 40 Index could be a great option for you. There are numerous ways to invest in the CAC 40 Index, and having that much choice can be scary if you’re a beginner investor. That’s why we’re here to guide you through the entire process and help you make the best informed decision possible when it comes to investing your money.
What is the CAC 40 Index?
The CAC 40 Index is the benchmark index for France’s Euronext Paris stock market. Included in the index are 40 of the biggest and most significant stocks in the country by market capitalisation. The Euronext exchange spans some of Europe’s most notable exchange, and the CAC 40 is one of its key indicators.
Is it a good investment?
It can be, depending on your own investment goals. The CAC 40 Index is filled with blue-chip stocks from numerous different industries and is constructed to track the strength of the French economy over time. Moreover, by investing in an index of 40 of France’s most prominent stocks, you gain the advantage of diversification that investing in one or two individual stocks can’t offer.
Of course every investment asset carries some risk, and the CAC 40 Index is no exception. Stock indices can fall hard in bear market conditions, so make sure to check that market conditions are in your favour before investing in the CAC 40.
How do I invest in the CAC 40 Index?
While you can’t invest directly in an index, there are a variety of investment products and methods that allow you to grow your capital in line with how an index moves. There are three key steps to consider before investing in the CAC 40 Index, and we’ve outlined them for you right here.
- Choose an investment type
- Choose a platform
- Use our top tips to succeed
1. Choose investment type
There are many different methods you can use to invest in the CAC 40 Index, so you should take your time and find the approach that makes the most sense for you. Just as you would typically evaluate multiple banks before opening a savings or checking account, you’ll want to compare the various options you have for investing in the CAC 40 Index before making your selection. Here are some of the most popular options from which to choose:
An ETF (exchange-traded fund) is an investment fund traded on a stock exchange. An ETF behaves like a stock in many ways, in that it trades during regular market hours, and contains bid and ask prices that look just like the ones you’ll find when investing in an individual stock. ETFs are a different type of investment vehicle though: they can hold different assets, such as individual stocks, bonds, or commodities – or they can serve as a proxy for a stock index such as the CAC 40 Index. An ETF can be an effective, low-cost way to invest in the CAC 40 Index while retaining the trading flexibility that comes with individual stocks. Still, remember that a CAC 40 Index ETF can become volatile and dangerous during a bear market, when market indices tend to fall sharply.
This method of investing is a good idea if you want access to the diversification of the CAC 40 Index, while retaining an ability to trade quickly and being charged low fees.
Another way to invest in the CAC 40 Index is to use an online broker to buy shares of all 40 stocks that the index tracks. This way, you can decide which stocks you want to keep longer-term, and which ones you want to sell. This is something you can’t do if you invest in the index as a whole, as with an ETF or mutual fund you’ll be invested in the entire index at once. The downside of this approach is that making 40 separate trades to buy each stock (plus even more trades when you sell each one) will lead to hefty transaction fees while also taking up more of your time.
This method of investing can still make sense if you want to test-drive all CAC 40 Index stocks, then gradually whittle down that list until you have a smaller number of top performers. The transaction fees associated with this strategy can be substantial, so this is an approach best left to wealthier investors. Although it is worth saying that the CAC 40 index is a good option to pick for trying out this investment method, as it is much less practical to do so with larger indices such as the FTSE 100 which contain far more stocks.
A mutual fund is a professionally-managed investment fund that pools money from a large number of different people, then invests that pool of money in different assets to generate profits. A CAC 40 Index mutual fund (also known as an index fund) offers the same advantage that an ETF also does, in that you get to invest in 40 stocks at once, but they are harder to trade. Unlike ETFs, mutual funds must be bought through a broker or directly from the company that administers the fund, and can only be done at the end of the stock market’s trading day. Another negative of mutual funds is that they charge higher fees than ETFs do. One other thing worth considering is that, while a mutual fund defrays risk through diversification, it also means you’ll be stuck holding both the best- and worst-performing stocks within the CAC 40 Index.
All things considered, a CAC 40 Index mutual fund makes the most sense for investors who want to buy and hold for a longer period of time, since it’s a more difficult investment product (and more expensive) to trade than an ETF.
2. Choose where to invest in the CAC 40 Index
Once you have decided which investment method gives you the most favorable buy-in to the CAC 40 Index, you’ll need to find a service that will execute your trade. Here are some of the most popular options for investing in the CAC 40 Index.
- Brokers & trading platforms. Brokers and other online trading platforms offer easy-to-use tools that enable you to invest in the CAC 40 Index quickly and inexpensively. The low transaction fees offered by brokers and other similar platforms make them attractive for many different types of investors, especially high-frequency traders. The shortfall of online brokers is that they tend not to offer much investment advice. If you’re looking for more hands-on help, it’s likely that you’ll want to consider other options.
- Robo advisors. Robo advisors rely on algorithms rather than direct actions by human beings to execute trades, so trades can be made quickly and transaction costs can be kept low (although not as low as with brokers). Additionally, many robo advisors also allow you to discuss your investment strategy with an advisor to help you make the right decisions. So this can be an effective hybrid approach, but one that’s still more hands-off than investing through a top financial advisor.
- Financial advisors. Financial advisors offer the most hands-on approach to investing, explaining the various pros and cons of different investment options in detail. This can be an especially big help to beginner investors, but does come at a premium price. As investing in the CAC 40 Index is a fairly simple process, it is likely not to be worth the cost in this case, unless you’re planning on making a variety of other more complicated trades.
- Banks. You can invest in an index such as the CAC 40 Index through your bank. The advantage of this method is that you gain the convenience of having all of your financial instruments (for example, your checking account, savings account, line of credit, and investments) with one financial institution. The problem is that banks usually charge high fees for this, but without offering the high level of advice that a good financial advisor offers. Unless convenience is your highest priority, you’ll almost certainly find a better deal elsewhere.
3. Use our top tips to be a successful investor
Before you invest in the CAC 40 Index (or any stock index), it pays to review these investment tips in order to give yourself the best chance of success.
- Do your research. You’ll want to mull over all the pros and cons of investing in the CAC 40 Index, as well as the different methods you can use to invest before putting any of your money in. Having a plan ahead of time will improve your chances of success, and also help you minimise the effect of judgment-clouding emotions such as fear and greed.
- Set a budget. Set a budget that suits your tolerance for risk, as well as your financial status. If you invest more than you can afford to lose, you could run up losses so large that it hurts both your confidence and your ability to make future trades. The golden rule of investing is not to risk more than you can afford to lose, so always bear this in mind.
- Select the right platform. We’ve already highlighted the different trading platforms you can use to invest in the CAC 40 Index earlier in this page. Review all these options in detail, and then choose the method that works best for your particular investing needs.
- Grow your investments gradually. For beginner investors, it makes sense to go slow at first by investing a smaller amount of money. You can always invest more capital as you become a more seasoned, skilled investor. This will help you grow your capital at the same time as your confidence.
- Think long-term. Investing in an index such as the CAC 40 is often a long-term strategy, one that can rack up gains during a long bull market if you get your timing right. Those positive market conditions are vital, as a bear market can sap a huge chunk of your money. Always take time to analyse broad market conditions before investing in an index.
Here’s a list of our top 3 recommended brokers to invest in indices ETFs:
What should I do now?
Ready to invest? Great! Go to the website of your chosen online platform, punch in the ticker symbol of the investment asset you like best, then click Buy. Congratulations, you’re now invested in the CAC 40 index!
Try some of our investment courses for beginners
Still not feeling ready to invest in the CAC 40 Index? That’s perfectly ok – you don’t want to risk any money until you’re certain of what you want to invest in. Have a browse through our easy-to-follow educational courses and news updates, right here.