- 1 Financial intermediaries
- 2 The functioning of the exchange
- 3 The different products
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Stock market investment is one of the most effective ways to grow your capital. However, individuals show some apprehension about taking the plunge and taking the plunge. These doubts are legitimate, the financial scandals of recent years have cooled the enthusiasm of many investors.
Eurotunnel’s stock market dives more than ten years ago or banking stocks following the financial crisis a short time ago left bitter memories. The disappointing performance of IPOs by leading public companies such as EDF or France Telecom, for example, does not reassure even the most cautious investors.
And yet, the stock market still offers much better prospects than real estate or risk-free investments in passbooks and bank accounts.
Before embarking on the stock market adventure, it is essential to surround yourself with the right people. You will entrust your savings, the fruit of your labour, to financial intermediaries, you must be able to have absolute confidence in them. Whatever they are (bankers, brokers, issuers, advisors or analysts…), their integrity must be recognized and they must offer you real added value.
Make sure that the services they offer you correspond to the fees they charge you. There is no secret, as for a TV or washing machine, compare offers to determine the right price-quality ratio for your needs.
Brokers or brokers
The broker is the only financial intermediary essential to go public. We often forget that the stock market is nearly 800 years old and that it has not evolved that much. The fundamental principle of the stock exchange remains that of a stock market bringing together buyers and sellers.
With millions of them, it was necessary to create a management role, capable of interacting with both end customers and the rest of the stock market.
The main role of the broker is therefore to provide you with a simple and understandable interface with the exchange itself, but also to respond to the regulator’s requests and to work together with the custodian (the body that maintains the register of security owners).
It must offer you the tools to find the securities that suit you and exchange them under the best possible conditions.
Today there are two main families of brokers with very different characteristics. The first family, the most accessible (although often the most expensive), is the family of services offered by your traditional bank. The securities and PEA accounts that your local bank branch will offer you have the advantage of being integrated with your other financial services, but it is the only one.
Their defects are multiple
- too expensive
- offering access to few markets
- very limited on derivatives products
- it is also sometimes difficult to have an exchange specialist on the phone to solve unusual problems.
Let us therefore quickly turn to these bank brokers to take an interest in specialized stock market brokers, the “pure players“. They are experiencing a dazzling new golden age thanks to the Internet after having to go through a period of scarcity since the dematerialization of financial transactions.
Stock exchange brokers make it their core business, so they have a complete infrastructure, sophisticated tools and increasingly competitive prices that make the stock exchange accessible to everyone, even for order amounts under a thousand euros.
Some brokers later became widespread, taking advantage of the success of online banking, particularly when they became subsidiaries of banking groups.
Boursorama has belonged to Société Générale since the beginning, while Fortuneo was acquired by Crédit Mutuel in 2006. For others, the stock exchange brokerage activity remains their only activity, we can mention Direct Stock Exchange or Binck.
Finally, new alternative brokers have emerged, particularly in Forex and CFDs. If they offer financial products, we cannot strictly speaking use stock exchange products because they are not listed, but we will come back to them later.
Market-makers or market-makers
The role of the market maker or market maker is to propose a purchase and sale price on a stock market value. If you place a purchase order on 100 Total shares, there is a good chance that it will be executed against a market-maker, although it may also be executed against another individual.
You do not need to pay a market-maker directly, to be absolutely exact his margin is already included in the difference between the selling price and the purchase price he offers you.
In the case of equities, you may not know that you are dealing with a market-maker. On the other hand, when buying bonds, options, ETF trackers or other derivative products (turbos, warrants, Forex, CFD), it is almost always necessary for the transaction to be completed because these markets are not very liquid.
If there were no market-maker, it would be very difficult for you to buy or sell derivatives, trackers or securities outside the 40 largest stocks in the CAC 40.
You should know that initially, the role of market-maker was often assumed by the broker himself, which allowed him to comfortably complete his margin. However, this situation generating conflicts of interest has become rare, but this is still the case for Forex and CFDs for example.
As their name suggests, issuing companies are those that issue financial products. In the case of shares or bonds, the issuing company is the company that wishes to raise capital. In the case of ETF trackers, the issuer is a fund manager that thus markets fund units.
Finally, for warrants, turbos, certificates or any other stock exchange products, the issuer is the company that guarantees the value of the product (a bank in most cases). The reliability of an issuer is very important because you take a credit risk on it: if the issuer goes bankrupt, it will be very long and complicated to recover the full intrinsic value of your product.
Paradoxically, French regulation is very simple since only one actor regulates issuing companies, brokers and market makers at the same time, namely the Autorité des Marchés Financiers, the AMF.
In addition to protecting investors, the Autorité des Marchés Financiers has the power to issue regulations, monitor financial market players and punish offenders.
It is also possible to refer a dispute to the AMF Ombudsman in the event of a conflict with a financial intermediary. However, this should not happen to you if you follow some cautionary advice, we can only recommend that you read this organization’s website regularly.
Indeed, in addition to complete and up-to-date investment files, it contains, for example, the declarations of managers when buying or selling shares of their companies as well as the results of the latter, a real gold mine for judging the good health of a company.
The functioning of the exchange
Understanding how the exchange and markets work is essential to avoid unpleasant surprises or difficult situations. There is nothing more unpleasant than being in an open position for a long weekend because of an order sent too late or having to pay extra fees due to improper handling.
There are two types of quotations on the Paris stock exchange, the continuous quotation which contains the majority of large stock market stocks, for example those of the CAC 40 or SBF 120 indices and the fixing quotation which concerns only a few illiquid securities of small companies.
Continuous rating actually works in three steps. From 7:45 am to 9:00 am, early morning investors and market makers start filling the order book (see below), but they are not executed immediately (no trades are made).
It is only at 09:00 a.m. that the stock exchange operator, Euronext in the case of Paris, will put the buyers in front of the sellers to determine the opening price. The session will then continue until 5:30 pm, the prices will evolve, punctuated by the publication of statistics, news from the various companies and transactions carried out. It will then be interrupted for five minutes, until orders accumulate again to determine the closing price for the day.
Settlement and delivery cycle
A stock exchange transaction is not completed once the securities are bought or sold, they must then be paid (settled) and forwarded from the seller to the buyer (delivered). This is when brokers contact the exchange and clearing house to exchange securities and payments.
The settlement and delivery cycle is two business days in France. In the absence of holidays, this means that a purchase of securities with a trading date of Monday will have a value date of Wednesday. In fact and in most cases the money will actually be debited on Monday by your broker, but in the event of a resale of securities the money will only be available on Wednesday.
Caution is therefore advised: you could be penalized by premiums if you withdraw this money before the value date.
The order book is the heart of the stock market mechanism, it is also a gold mine that contains a lot of information on the short-term trend. Let’s take the case of a share of TROPIGLU, a manufacturer of tropical glues based on guacamole. During the session, buyers and sellers place orders, mostly around the last transaction price.
|Action TROPIGLU, last price: 19.00|
We can already notice that the further away from the last known price (19.0€), the more liquidity is important. This is due to the presence of market-makers (the market-makers mentioned above), who need a certain margin to earn money and will only be ready to execute the largest orders. However, other more aggressive market makers will offer smaller sizes by performing high-frequency arbitrage.
Imagine that you want to buy 100 shares, you can for example place yourself at the best offer (19.10 €), you will then be instantly executed. You will buy your shares at €19.10 and the order book will be modified:
|Action TROPIGLU, last price: 19.10|
|100||18.90||19.10||100 (200 – 100)|
You may also consider that €19.10 is too high a price for a TROPIGLU share and prefer to place yourself in the book at €19.00 until a seller wishes to sell you these shares at this price.
|Action TROPIGLU, last price: 19.00|
If 19.00€ is still a little too expensive, you can expect 18,90€. Attention, in this case your 100 shares can only be purchased once the person already in the 18.90€ booklet has been executed at this price or has cancelled his order.
|Action TROPIGLU, last price: 19.00|
Of course, the more aggressive your order is, the faster you will be executed. For smaller order sizes in a liquid book, placement is not very important. On the other hand, on the actions of SMEs for example, there is a real war of intoxication going on and you will have to be very careful. Especially since the handling of order books via the placing and cancellation of orders is strictly prohibited and liable to criminal prosecution.
The different products
When it comes to investment, you have to be able to diversify and on the stock market, you don’t just find equities. In recent years, stock market operators have extended their offer to individuals or professional investors.
There are options on the Taiwanese market on the European Eurex exchange, a large number of ETFs (also known as Exchange Traded Funds or trackers) on all possible and imaginable strategies and a plethora of listed derivatives for individuals (warrants or turbos).
Listed or OTC products
Contrary to popular belief, the world’s largest markets are not stock exchanges. Indeed, Forex and interest rate products are mainly traded over-the-counter between professionals, known as the OTC market. The majority of these markets are not accessible to individuals: the size of an order is generally greater than one million euros and can reach several hundred million.
For other products such as commodities or bonds, only a portion of trading takes place on the stock exchange. These are the most standardised and liquid contracts that can serve as reference prices for other assets. This is also the case for derivatives, it is necessary to know how to differentiate between listed options and those traded over-the-counter directly with an intermediary (this is the case for all binary options).
There are three advantages to using listed products and therefore the stock exchange: liquidity, security and the guarantee of a market price. The centralized order book offered by the exchanges makes it possible to accommodate a large number of buyers and sellers that a financial intermediary with bilateral relations with each of them could not manage.
The presence of a clearing house reduces the exchange’s credit risk: if your counterparty is unable to pay you, it is this clearing house that will guarantee your payment and handle its margin calls. Finally, the transparency of stock markets in terms of prices is in contrast to the opacity that prevails on OTC markets.
The use of OTC is justified when the complexity or specificity of the product means that it could not be listed on the stock exchange. Binary options are a perfect example of this since they combine a short lifespan and entry prices and therefore different exit prices for all buyers. In Forex, the colossal volumes and the complexity of currency delivery also complicate the transition to a listed platform.
Equities, bonds, bonds
Equities are traditionally the flagship products of stock exchanges. Although bonds have been traded more over-the-counter since the 1980s, they have been making a strong comeback recently. There are all types of shares on the stock exchange depending on the platforms and sectors on which they are listed.
Most of the largest companies are listed on the stock exchange, which allows them to raise funds faster and at a lower cost. Their shareholders also gain greater flexibility: they can increase or decrease their shares at any time. Much smaller companies have also chosen to go public, both to raise capital and to gain visibility. It is also possible to buy bonds on the stock exchange, although the universe of securities is much smaller than for the OTC market.
Trackers are listed investment funds, also known as ETFs (Exchange Traded Funds). Most of them replicate the performance of a stock market index, although others make it possible to influence the health of a sector (industry, raw materials, etc.) or even to reduce a stock or increase interest rates. In recent years, trackers have become the most prominent products on the stock market.
The most traded stock on the New York Stock Exchange is a tracker on the Standard & Poor’s S&P 500 Index. Their main advantage is that they can invest in an index with the very low cost of a typical transaction, reduced management fees and order sizes reduced to a few hundred or thousand euros.
There are many derivative products available on the stock exchange, those called exchange products are also marketed to individuals. These products, known as warrants, turbos or certificates, offer leverage through a borrowing mechanism that multiplies the magnitude of gains or losses. While it is very attractive because it promises attractive returns, it also has the ability to melt your capital like snow in the sun and must therefore be used carefully and sparingly.
The stock market is therefore a complete and constantly evolving universe that will necessarily offer you investment opportunities adapted to your needs. You can now invest a few hundred dollars at a reduced cost to test the ground and make your first steps. The best traders are far from all having a doctoral student’s technical and financial knowledge: learning by doing remains predominant, it is also the most effective method.
Find our files on different investment methods:
- Investing your money: the complete guide
- Invest and trade gold
- Investing in wine
- Investing in real estate
- Investing in rare earths and rare metals
- invest in the Yuan, our analysis