Playing the stock market can be lucrative, but also full of risks.
Investing part of one's assets in stocks and shares can be highly
lucrative, but also a very risky option. Here again, patience and a
long-term view are indispensable virtues !
The stock exchange is a public marketplace where stocks, merchandise and services are traded. The price of shares is determined depending on supply and demand. Objectively, of course, the price should reflect the exchange value of an asset, service or company at a precise point in time, while also anticipating its future value. But in reality, this is not the case. Especially since the appearance of the new communication and information technologies, targets for all kinds of speculation. The fortunes amassed at the end of the ’eighties turned everyone’s heads. But the hatchet fell in 1990 : the Internet bubble burst and many small investors lost all their savings. They had forgotten that the stock market is not a game where everyone wins all the time. And above all, they hadn’t followed precious advice which would have enabled them to reduce their losses.
Long-term investments
Investing on the stock market is a rational act of commitment. Placing part of one’s assets in stocks and shares thus requires a logical line of behaviour and the best possible information on the real value of the company concerned. The decision to buy or sell shares must be taken at the right time, ie, solely depending on the market and the objective value of a company, not on one’s personal needs or desires. The basic rule is to invest long term. You shouldn’t be swayed by the impact of a poor economic climate on stock market quotes. And you should only allot to stock market investments that portion of your liquid assets you’re sure you won’t need over the next few years.
Beware of mass movements
An investor in stocks and shares is someone who stands alone, free to decide whether to buy or sell his shares. But as the sociologist Veblen said : “Man is a social animal. His behaviour, needs and desires are strongly influenced by the members of the group to which he belongs or wishes to belong”. So playing the stock market means entering a new world influenced by rumours, manipulation, emotions and speculation. It’s not always the real value of a company that turns the wheel of fortune, but rather the whims of speculators. Because of this, listed companies have built behavioural models to see how investors think and act in response to the business climate. Because as soon as the market starts to get nervous, either up or down, or is confronted by major economic uncertainties, market players get feverish and rationality gives way to emotion, often making people behave like sheep.
Key factors for success
Portfolio managers are unanimous : by observing a few fundamental rules, one can always preserve the capital one invests over the medium to long term. These principles are based on a study of several dozen stocks, from various sectors, and over several years. The ideal portfolio contains at least twelve different stocks. Historic references are always good references (average yield, sectorial valorization ratios…). Obtaining objective information is vital for decision-taking : it alone enables you to avoid following unjustified trends, bullish or bearish. And one shouldn’t be afraid to sell with a limited loss if prospects don’t look good. The sequence is always the same : after a decline, quotes pick up again, sometimes moving higher, but on one condition : that worldwide prospects, the company’s balance sheet and profits are positive. Most of the time, prices of top-quality shares reflect the international business scene : small firms carry the highest risk, but also the strongest potential for growth. Technology stocks, very speculative and volatile, should be reserved for well-informed connoisseurs of these specialized sectors. Finally, as soon as gains attain 15 to 20 %, start thinking seriously about selling your shares.
No-risk investments
Many investment plans offer this possibility in the guise of PEPs or capital funds with a guaranteed return. They are generally SICAVs or FCP funds. Legislation requires the management company to reimburse the investor all the sums he has paid in, on expiry of his contract (usually eight years). A minimum interest rate is proposed when one signs the contract, which is also guaranteed until it expires. Naturally, only the safest stocks and shares are selected for this type of investment.
By Gilbert Gay-Parme.