A stock market index is calculated according to the price of a certain number of different shares, chosen according to their capitalization. It is expressed in points and provides an overview of the evolution of a market beyond the variations of one particular value.
Each major financial center has at least one basic index, composed of the largest stocks in terms of capitalization. The Dow Jones, calculated from the thirty largest American stocks, is the benchmark for the American market. The DAX 30 follows the same principle for the Frankfurt stock exchange.
The CAC 40 is representative of the largest stocks on the Paris market. The main index is representative of large companies, largely involved in world trade. Certain sectors are often over-represented, such as oil (whose super-majors, such as Total, weigh heavily on the stock market) or luxury goods (LVMH represents nearly 10% of the CAC 40!). The use of broader baskets offers a more representative view of the entire market : the SBF120 includes 80 more stocks than the CAC.
The primary aim of the CAC 40, the DAX30 or the Dow Jones is to provide an overview of the evolution of a market through a single stock : if the stock market falls by 3% in one day, it means that a wind of panic is blowing and it is not surprising that all stocks fall regardless of their specific news. The performance of a stock can thus be nuanced according to the context: it will often be more meaningful to look for outperformance in relation to the reference index than to be interested in the absolute evolution of the price...
The CAC (or the SBF120, the DAX30) are also the basis of derivative instruments which are privileged speculation tools for a trader: it is possible to position yourself directly on an index through trackers (ETF) or options (buy or sell, call or put) and thus to profit from the anticipated evolution of the stock market without being dependent on the specific and sometimes unpredictable risks of a value.
Following the evolution of one or more stock market indexes allows you to look at general stock market trends... or to take advantage of it yourself by using derivatives.
