Investing in the stock market is a source of suspicion among the French. However, it is within the reach of any investor with a minimum of knowledge, method, and curiosity. Here are some tips to follow before getting started.
How does the stock market work?
The stock market is a market where financial securities, mainly shares, are traded. A distinction must be made between the primary market and the secondary market.
The primary market is where securities are offered for the first time. In this context, institutional investors (investment companies, pension funds, banks, and insurance companies) subscribe to IPOs, capital increases, or bond issues.
On the secondary market, these same securities are offered to savers without the issuer’s intervention. Shares, bonds, and money market products are available there.
Thus, the stock market is a place where supply and demand meet. Supply comes from companies and governments with financing needs. The financial securities issued are purchased by investors (individuals, companies, governments). As in every market, the price of securities is set based on supply and demand. If supply exceeds demand, the price decreases to reach equilibrium, and vice versa.
5 tips for investing in the stock market as a beginner
Are you considering investing in the stock market but don’t have any prior knowledge? Don’t hesitate to follow these tips before committing your savings:
1 – Know the different financial instruments
The Stock Exchange allows the exchange of various financial products. Among the best known are:
The actions
A share is a security of ownership issued by a capital company in need of financing. Owning a share means holding a portion of the capital of that company and having rights (voting rights at shareholder meetings, right to receive a dividend).
The obligations
A bond is a debt security that can be issued by a company or a government. It represents a portion of a loan and therefore allows the investor to receive annual interest payments called “coupons.” At the end of the loan, the company or government repays the capital. Unlike a share, a bond does not confer any rights.
UCITS shares
Units in an Undertaking for Collective Investment in Transferable Securities (UCITS) represent a portion of a portfolio of transferable securities. There are two types of UCITS: Variable Capital Investment Companies (SICAVs) and Common Investment Funds (FCPs). These are regulated by the French Financial Markets Authority (AMF).
Other financial instruments to be aware of are derivative products whose performance depends on another asset, the underlying.
2 – Choose a financial intermediary
Before you start investing in the stock market, you need to choose a financial intermediary. To avoid the often high fees of traditional banks, it’s best to choose an online broker.
It’s important to work with a trusted broker. Beware of brokers who seemingly offer unbeatable rates but offer little or no financial guarantee. In addition to the financial strength, reputation, and track record of the company in question, you should evaluate the brokerage fees. When you buy a security, you pay a commission to compensate the broker. This varies from one broker to another and depends on the number of orders placed, their amount, and the type of account. It’s generally a fixed fee or a percentage of the order amount.
Another concept to be aware of when choosing an intermediary: the Deferred Settlement Service (SRD). It allows the client to invest “on credit” and is accompanied by significant leverage, allowing them to invest an amount that can be 5 times greater than their capital.
Generally speaking, less dynamic savers will tend to favor a broker offering precise investment monitoring and support services. Conversely, independent and active investors will prefer a broker offering few services, focusing on the broker’s responsiveness and access to an efficient trading platform.
3 – Take an interest in investment performance
The return on an investment in the stock market depends on several factors:
The investment horizon
Traditionally, we talk about short-term investment (less than one year), medium-term (between 1 and 5 years),s) or long-term (more than 5 years).
It is difficult to predict market fluctuations for short-term investments due to the volatility of the product and external events (financial crisespoliticss, and changes in commodity prices) that could occur.
In the medium term, you have more time to cope with price fluctuations. Therefore, returns are more predictable, although they still depend on the economic environment.
In the long term, it is possible to hope for a correction of short-term fluctuations thanks to market growth.
Market fluctuations
As mentioned previously, economic announcements, financial and health crises, and commodity price variation policies can have an impact on the markets.
Performance risk
It should be kept in mind that past performance is not a guide to future performance.
So, if you are new to the stock market, remember to take into account volatility and the risk of capital loss.
4 – Choose a support for investments
To be able to invest in the stock market, it is necessary to have a medium on which to house the securities.
Opening a securities account will allow you to invest in French and/or foreign financial markets and in all types of securities (mutual funds, stocks, bonds, warrants, trackers, etc.). There is no minimum or maximum investment limit.
You can also open a Share Savings Plan (PEA) to invest in shares of French and European companies while benefiting from advantageous tax treatment. A distinction must be made between the “classic banking” PEA, which allows you to build a portfolio of shares in companies in the European Union (capped at €150,000), the “classic insurance” PEA, which is taken out with an insurer and takes the form of a capitalization contract in units of account (capped at €150,000), and the PEA-PME, dedicated to investments in small and medium-sized enterprises (capped at €225,000).
5 – Define an investment strategy
Before placing your first order, consider defining your investment strategy. This includes determining your profile, your goals, and the level of risk you’re willing to take. If you’re looking to gradually grow your savings to prepare for retirement, opt for low-speculative assets. On the other hand, if you’re aiming for rapid returns and your assets are large enough to withstand a high risk of loss, you may want to consider a more dynamic investment.
