What Is the DAX? Overview of Germany's Stock Market Index

Germany Stock Market Index: DAX 40 Overview

The DAX (the Deutscher Aktien Index or the GER40) is a stock market index that tracks the performance of the biggest companies trading on the Frankfurt Stock Exchange. It is the most important benchmark index in Germany and one of the most followed indices in Europe. The DAX is often used as a barometer for the overall health of the German economy.

In today’s article, we are going to provide a detailed look at what the DAX 40 represents, its history, how it’s calculated, and why it’s a popular asset to trade.

What Is Germany’s DAX 40 Index?

Germany’s DAX 40 Index is a key barometer of the performance of the country’s largest companies. It was launched in 1988 on the Frankfurt Stock Exchange, the predecessor of the Deutsche Boerse. It should be noted that the Deutsche Boerse itself is now listed on the DAX index. DAX 40 tracks the 40 most liquid and largest German companies in terms of market cap.

The companies listed in the DAX are multinational companies that influence the German domestic economy and the global economy. The DAX 40 is an important benchmark for investors. It is worth keeping an eye on its movements if you are looking to invest in Germany.

How Is the DAX Stock Index Calculated?

The DAX index is a weighted average index. It means that the companies with larger market cap have a bigger impact on the index performance.

To calculate the index, the following values are to be considered:

• the current company’s price
• company’s closing price on the trading day before the company was included in the index,
• freely available number of shares (i.e., those that are available for trading and not held by insiders, governments, or promoters) on the date of calculation and when the company was first included in the index
• the overall number of trading stocks on the stock exchange.

Also, the index considers distributed dividends and the effect of the company’s inclusion and exclusion in the index.

The Xetra trading venue has been computing the index’s price every second since 2006, meaning investors can track its movements closely.

DAX 40 Companies

On September 3, 2021, the global index provider of Qontigo STOXX Ltd. announced an expansion of the DAX index. Ten more companies were added to the list. The DAX 30 became DAX 40. Airbus, Zalando, and Siemens Healthineers were among the additions.

Here is the list of DAX 40 companies as of March 8, 2022. It is reviewed quarterly.

There are six leading sectors whose shares account for over 10% of the overall index:

1. Industrials (19%)
2. Consumer discretionary (18%)
3. Materials (17%)
4. Informational technologies (12.5%)
5. Finance (11%)
6. Healthcare (10%)

Sector weights: DAX with 30 vs. DAX with 40 constituents (as of September 2021)

Top-10 index companies by market capitalization as of March 8, 2022:

Admission to the DAX

In order for the shares of a particular company to be included in the DAX index, the following criteria must be met:

The major one is the free-float market capitalization on the last trading day of a month. The volume-weighted average price of the last 20 trading days is used to calculate the capitalization

Qontigo’s equity index rankings are used for decision-making when the index is reviewed. There are certain requirements for the company to be included in the ranking:

• The company must be listed on the Regulated Market of the German Stock Exchange.
• Its leading or operating headquarters must be in Germany. (Foreign companies may be included in the DAX index if they have a leading headquarter in any EU or EFTA state or operating headquarters in Germany).
• The free-float of the company’s shares must be equal to at least 10%.
• The company must have positive EBITDA for at least two recent fiscal years.
• The company’s shares must be continuously traded on Xetra.
• The company must be listed for at least 30 trading days.
• The company must provide annual, semi-annual, and quarterly financial reports.
• The company must stick to specific provisions relating to audit committees in the German corporate governance code.

What Drives the DAX Index?

There are a number of factors that move DAX prices.

1. ECB. The European Central Bank is one of the biggest drivers of the index’s rate, as its decisions about interest rates and other monetary policy measures can have a big impact on the German economy. After important announcements of the international financial institution, the index’s volatility increases. The rise or fall depends on the nature of the statement.
2. State of the German economy. DAX 40 is one of the leading indices reflecting the state of Germany’s economic health. It represents about 80% of the market capitalization of listed stock companies in Germany. As the index mainly consists of Germany-based companies, the strength of the country’s economy will affect the index’s value. Traders should pay attention to such economic reports as GDP growth, job data, and inflation rate releases.
3. State of the industry. The value of DAX 40 is mostly determined by the performance of highly-weighted stocks. It’s recommended to define what companies have the largest impact on the index and check the state of the industries they belong to. Events in the industry will affect the company’s state, leading to the index’s increased volatility.
4. Global economic and political events. First, traders should pay attention to the economic and political atmosphere in the EU, as Germany is one of the leading EU countries. Second, global political and economic turbulence will affect the overall stock market, leading to increased fluctuations in the DAX 40.

Historical Performance of the DAX 40

The DAX 30 index was first published on July 1, 1988, with a starting level of 1,163 points. The first dramatic plunge occurred on October 16, 1989. The DAX index lost around 13% within one day due to the stock market crash on Wall Street. There were more ups and downs afterward. However, the overall market trend was bullish and lasted until March 2000.

After that, the index experienced a long-term downtrend. A fade in enthusiasm for technology stocks led the index to the lowest levels seen since late 1995. In March 2003, it fell below 2,200 points. However, the recovery of the global economy increased investors’ confidence and pushed the index up. Yet, it took years to reach new highs. In Summer 2007, the index surged to a record high of 8,000 points.

But the bullish trend didn’t last for long. The global economy was in crisis in 2008. By March 9, 2009, the index had lost over 56% since its maximum recorded value on July 13, 2007.

Another all-time high was reached on June 5, 2014, when the index rose above 10,000. The increase was caused by the ECB policy of cheap money. Afterward, the index set a new maximum in 2015 when the central bank decided to print even more money. At the end of 2017 and the beginning of 2018, the index hit new highs.

It would have continued surging if the Covid-19 pandemic didn’t hit the world at the end of 2019. In March 2020, the index plunged to the lows of 2016. However, the index managed to recover fast. On November 18, 2021, the index reached its all-time high of 16,290.19.

Since January 5, 2022, the DAX 40 has suffered from a strong fall. As of March 8, the index has touched the lows of November 2020.

How to Invest in the DAX 40 Index

It’s not possible to invest in the index directly. Let’s consider options that can be called index investments.

First, you can buy a share of a mutual fund or a popular ETF (exchange-traded fund) that tracks the performance of DAX 40. This option is popular among investors, as fees are lower with most mutual funds and ETFs than when buying shares from a single company.

The second option is to buy shares in individual companies that are included in the index. However, as you may know, the idea of any index is to provide access to a wide range of stocks with limited investments. When investing in a single company, you’ll need to do a comprehensive analysis. Moreover, it will be too expensive to buy shares of all 40 corporations included in the index.

Investment in DAX 40 may be very expensive. So, you better consider DAX 40 trading.

How to Trade DAX 40

If you want to trade the DAX, then there are three different ways. You can trade either DAX 40, DAX 40 futures, or an ETF that includes DAX stocks. Such an ETF will mirror the performance of the original DAX 40 index. These instruments are traded as CFDs.

CFD stands for contract for difference. When trading CFDs, you don’t own real assets; you speculate on the price difference. You can open both long and short trades depending on your price forecast. The idea of CFD trading is to predict the future asset’s price correctly and benefit from the difference between the opening and closing rates.

CFD trading has several benefits. First, you don’t need to wait for the price of an asset to increase. You can buy and sell according to the current market conditions. Second, you can use leverage. Although leverage trading bears risks of higher money loss, it allows trading an asset with limited funds. As the price of DAX 40 is around 13,000, it may be challenging to enter the market without a loan.

DAX 40 trading is available on NAGA – one of the world’s leading social trading platforms. NAGA is a regulated company with a strong focus on security and customer satisfaction. It allows traders to copy the trades of experienced professionals or create their own strategies. NAGA offers a leverage of up to 1:20.

Final Words

The DAX 40 is among the leading European indices. It serves as a barometer of the economic health of the German economy. Although it’s highly expensive, it attracts both traders and investors.

The index value depends on clear factors that allow traders to predict its price direction. DAX 40 experiences increased price fluctuations. Still, it’s one of the most stable financial instruments, as it mostly consists of German corporations. It’s a well-known fact that blue-chip stocks are mostly represented by German companies.