The stock market, what is it for

5 avril 2022

The Stock Exchange makes it possible to bring together agents who have financing needs (supply) and agents who have financing capacities (demand).

Confrontation between supply and demand

The offer comes from companies or States that have financing needs. They issue financial securities which are purchased by investors. The demand comes from people who have financing capacities and who wish to invest. They can be individuals, companies, States. The biggest investors in financial markets are institutional investors.

As in all markets, the price depends on supply and demand. If the supply is greater than the demand (e.g. O1 > D1), the price decreases to reach equilibrium. Conversely, when demand exceeds supply (e.g. D2 > O2), the price increases to reach equilibrium. If for a given price, the quantity supplied equals the quantity demanded, this means that it is the equilibrium price, noted P*.

Primary market, secondary market

The primary market, where titles are offered or introduced for the first time, is the “new market”. The secondary market, where these securities are traded, is in a way “the second-hand market”.

When la Française des jeux went public on November 21, 2019, the company issued securities on the primary market which were bought by investors. These investors then relisted these securities on the secondary market.

Primary market

Securities issues are carried out by companies (known as “issuing companies”) on the primary market. Institutional investors then subscribe to initial public offerings, capital increases (shares) or bond issues (debt securities).

It is the meeting place between companies seeking capital to ensure their development and the holders of capital. All limited companies issue shares but not all are listed on the stock exchange, only the largest or most attractive are.

Secondary market

These same securities are then offered to savers on the secondary market, which can be considered as the second-hand market. The sender no longer intervenes. There are several kinds of products. The best known to the general public are equities, bonds (borrowing) and monetary products (based on short-term rates). But other products available to individuals exist.

1. 1-Spot markets, where transactions between buyers and sellers are settled almost without delay (because there is a delay, moreover sensitive in terms of security, for the delivery and settlement of the securities);
2. 2-Futures markets, where transactions concluded on a firm basis are carried out on a date anticipated in relation to delivery. Futures markets include options markets, where products representing the right to buy or sell a financial instrument known as the “underlying asset” are traded;
3. 3-Organized and, in some cases, regulated markets, where a service provider, the Stock Exchange, and henceforth the "market operator", organizes the confrontation between supply and demand, price setting and all or part operations that are associated with the completion of the transaction;
4. 4-Over-the-counter markets where a face-to-face meeting is organized between buyer and seller, with or without operating rules, with or without integration into a de facto network ensuring the settlement of transactions.

The different financial instruments

The Stock Exchange is a place where financial products, called "financial instruments", or transferable securities are traded.

1. 1-A share is a title deed. A share is issued by a capital company that needs to finance itself. Owning a share means owning part of the capital of this company. It gives rights, in particular the right to vote at shareholders' meetings and the right to receive remuneration: the dividend, paid every year according to the company's results.
2. 2-A bond is a debt security. A bond can be issued by a large corporation or by a state. Issuing bonds means taking out a loan from investors in the financial markets. To hold a bond is to lend money to a company or a government. Each bond represents a fraction of a loan. The investor who holds a bond receives interest, called "coupons", every year. At the end of the term of the loan, the company or the State repays the capital. A bond does not confer rights, such as the right to vote, unlike a share.
3. 3-The units of UCITS (Undertakings for Collective Investment in Transferable Securities) represent a fraction of a portfolio of transferable securities. These are mainly FCPs and SICAVs.
4. 4-The other financial instruments are derivative products, i.e. products whose evolution depends on another asset, the “underlying”.

Financial market liquidity

The primary function of the Stock Exchange is to allow investors to buy and sell their securities on the secondary market. This is called liquidity. In fact, no IPO would be successful if it was not accompanied by the guarantee of being able to subsequently sell the securities acquired.

A liquid market is a market in which a lot of transactions take place. Conversely, an illiquid market is a market in which only a few exchanges take place. A liquid security has the double advantage of being easily negotiable and not being subject to manipulation of its price. On the other hand, an isolated operator can weigh heavily on the price of an illiquid security.