Understanding the stock market

The june 09, 2023

We often talk about the financial markets and the stock market, but what are they really all about? Many of the major players that impact on our daily lives are involved. So how do you make sense of rises, falls or bubbles? Wealth A7 gives you the basics to help you understand what's going on.

Historical background

The origins of this institution date back to the Middle Ages. Although there were many places all over Europe where exchanges took place, it was the Van der Beurse family who institutionalised the operation by organising and managing the first place where transactions took place. It was they who gave their name to this organisation and coined the word Bourse. It was here that currencies were exchanged, contracts were signed and exchange rates could be consulted. This concept spread throughout Europe, and took shape in France in September 1724 with a ruling by the King's Council. Thus was born the Paris Bourse.

After more than 260 years of development, a major change came in 1987 with the end of the stockbrokers' monopoly, the computerisation of the Bourse and the adoption of a continuous quotation system. The latter gave its name to the CAC 40 (Cotation Assistée en Continu) index at the end of 1987, which is made up of 40 of the 100 best-quoted companies with a large number of shares available.

Who are the major players?

The main players are investors, issuers, intermediaries and institutional regulators such as legislators and public bodies. The latter ensure that the market operates smoothly and that investors are protected. The intermediaries include the companies that supervise the stock exchanges, Euronext in the case of the Paris stock exchange, and the service providers that transmit and process orders on the market (banks, brokers, etc.).

The 2 major players who give the stock market its raison d'être are the investors who come to invest their money and the issuers who come to raise funds.

Understanding market fluctuations

As always, the market is governed by the law of supply and demand. The greater the demand, the more the investor will be prepared to pay for the financial instrument (share, bond, currency, commodity, tracker, derivative, etc.). As a result, the price will rise until it reaches its current 'ceiling', i.e. until demand dries up. What is more complicated to understand are the buying criteria and factors of informed investors, who are generally one step ahead of traditional investors and who generally influence price trends.

In the equity market, which is the most volatile, there are two types of purchase.

The first is linked to a company's financial results. Two types of company are particularly attractive: firstly, those considered to be 'blue chip' dividend payers. Even if the share price is high, the conviction of having recurring revenues is reassuring and gives the share price a degree of stability. In France, these include luxury goods and energy companies. The second type are growth companies. Economic results are good and on the up, pointing to an increase in the share price, which is attractive at this time. The PER (Price Earning Ratio) is often used to check the relevance of these investments.

Then there are conviction buys. This usually involves more recent companies in very buoyant economic sectors. The company's results are not yet significant, but there are many signs that significant growth lies ahead. TESLA is a perfect example. Even before it became profitable in 2019, its share price was so high that its value on the stock market already far exceeded that of Ford and General Motors, two historic giants of the "traditional" car industry. Thanks to this craze, in October 2021 it reached a market capitalisation of more than $1,000 billion, which was more than the sum of the valuations of the world's seven biggest carmakers! In this case, we can see that share prices have reached high levels that are out of sync with the profits generated. Investors were simply convinced by the company's potential.

Unfortunately for some buyers, buying on conviction can sometimes turn into a disappointment. When share prices rise, many people want to profit from the increase. This spiral of buying helps to fuel the rise, which perpetuates these purchases and so on. This continues until a factor internal or external to the company (such as regulatory reforms or competition) puts a stop to it. The bubble bursts! Everyone wants to sell to at least recoup their investment, but it's a downward spiral for shareholders.

There are real opportunities to be seized on the financial markets, but you also have to avoid the pitfalls that lie in wait. Wealth management professionals working with the best asset management companies can provide you with quality support. Wealth A7 has been around for almost 20 years and can guide you; contact us!

In a world on the move, Wealth A7 is there to bring your dreams to life.


Article by : STEPHANE SAES

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