The investor's vocabulary

• Action : A share is a title to a part of a business. By buying shares, you become a co-owner of this company in which you own a share and you can benefit from its performance and participate in general meetings.
• Shareholder : A shareholder is a natural or legal person who owns shares in a company.
• Market capitalization: The market capitalization of a company corresponds to the total value of all the shares issued by the company and which constitutes all of its capital. It is calculated by multiplying the price of a share by the total number of shares in the company.
• Dividend : A dividend is a portion of the profits that a company distributes to its shareholders once or several times a year.
• Stock market index : A stock market index is an indicator that represents the performance of a group of stocks in a sector, stock market or economy. In general, a stock market index is made up of the largest stocks on a given stock exchange. The best known are the CAC 40 (the 40 largest French market capitalizations), the DAX (the 30 main German companies on the Frankfurt Stock Exchange) and the FTSE 100 (the 100 largest companies on the LSE in terms of market capitalization).
• Bonds : Bonds are shares of debt issued on the stock exchange by companies, local authorities or states in order to obtain financing. By subscribing to this type of financial product, you lend money to the issuing entity, and become its creditor. In exchange for your funds, the company, state, or territory pays you a fee, often quarterly or annually, called a coupon. Reminder: The average yield on bonds denominated in euros from high-quality companies over the last 10 years is around 3.4% per year.
• Liquidity : The liquidity of an investment is the ease with which you can quickly sell this investment at a known value and at its market price. Liquidity on the stock market is very important. Indeed, the sale of a share or a bond on the stock market makes it possible to deal with an unexpected situation by immediately having the necessary funds, without suffering a discount (or depreciation) compared to the market price at the time of the sale. This is one of the big advantages of the stock market compared to investments made in real estate, investments in objects or investments in companies not listed on the stock exchange (private equity investment).
• Capital gain and loss: It is the difference in the value of a security between its acquisition date and the day it is resold.
• Wallet: A portfolio includes several securities held by an investor. In a portfolio, assets can be of several types: shares, bonds, funds, ETFs or other listed financial products. A good management rule is to properly diversify your portfolio between companies and sectors, possibly currencies... to limit risks and volatility and thus avoid that a single security represents more than 5 to 7% of the total value of the portfolio, which in the event of difficulty would have an excessive impact on the value of the portfolio.
• Yield : Return is the gain or loss made on an investment compared to its initial cost over a given period (generally 1 year). For a stock or a bond, this includes the change in its price, the dividends and interests that may have been received (the net return is the gross return defined above) minus taxes, taxes, and other fees levied by banks.
• P/E (or PER, for Price-to-Earnings Ratio) means “price/earnings ratio.” It is an important financial indicator that measures the valuation of a company in relation to its current profits or the current fiscal year. Divide the current share price by the current (or next estimated) net earnings per share. This usually gives a figure between 4 and 40. In 2024 the average PE for the Eurostoxx 50 is 15, the average PE for the S&P500 is 28 and 32 for the Nasdaq100.

The higher a P/E, the more expensive the stock is compared to the company's current earnings. This may mean that investors expect strong future earnings growth and that they are confident in the company's ability to grow strongly and profitably, but it can also indicate overvaluation. Sometimes it is reasonable to wait before investing in a very good company because its PE (and therefore the share price) is excessively high, subject to excessive enthusiasm.

The lower a P/E, the cheaper the stock is compared to current earnings. This can be a buying opportunity, but it can also reflect a lack of confidence in the future of the business and in its ability to grow and maintain profits.

P/E is often used to compare companies in the same sector because valuation standards vary between industries. It can also be compared to the historical company average or to the average market P/E.

Attention: although this ratio is very important to value a share, it does not take into account other factors such as the company's debt, its competitive position, the quality of its management, the constraints specific to the company (legal, social, geopolitical...), the evolution of the cost of its resources (labor, energies, raw materials, taxation...), the constraints of the sector as well as the market interest rates and their future evolution. It is therefore often used in conjunction with other financial analysis tools.

It should be noted that market interest rates can have a significant influence on the future value of the company by increasing the cost of its debts (or the return on its cash flow) and by reducing the value of its estimated future profits (discounting).

It should also be noted that market interest rates have a significant influence on the value of bonds issued by the company by reducing their value in the event of a rise in market rates and especially since their maturity is far away (or by increasing their value symmetrically in the event of a fall in market rates), so it is wrong to say that corporate bonds are risk-free, they are affected by changes in market rates in proportion to their residual duration and possibly by the difficulties of repaying the issuing company.

• Money market rates, which represent short-term borrowing costs, influence the price of shares and bonds through several mechanisms:

Impact on bonds: Interest rates are inversely correlated to bond prices. When rates rise, new bonds issued offer higher returns, making existing bonds less attractive. This therefore leads to a decrease in their value. Long-term bonds are more sensitive to changes in interest rates than short-term bonds, due to the amplified effect of time on discounting future flows. But when rates rise, the returns on new bond investments become more competitive with equities, which can turn investors away from equity markets to bonds as long as the net returns on these new bonds exceed inflation.

Impact on equities: A rise in money market rates increases the cost of borrowing for businesses, which can reduce their profit margins and investment capabilities. This can weigh on stock prices, especially for highly indebted companies.

Rates affect stock valuation models (like discounting cash flows). Higher rates lower the present value of future earnings, which can lower stock prices.

Rates also influence risk perception: a rise in rates can signal an overheated economy, which could anticipate more restrictive monetary policies or an economic downturn, weighing on financial markets.

In summary, an increase in money market rates tends to reduce the value of bonds and can put downward pressure on equities by increasing financing costs, reducing the relative attractiveness of stocks, and lowering future valuations. However, these effects vary according to global economic conditions and the characteristics of the businesses and assets concerned.

• Volatility On the stock market refers to the change in the value of a financial asset (such as a stock or an index) over a given period of time. It measures the extent and frequency of price fluctuations and is a key risk indicator in financial markets. It is generally expressed as an annual percentage.

High volatility means increased risk, as prices can fluctuate unpredictably.

Low volatility is often associated with increased investor confidence, while high volatility may reflect economic or political uncertainty.

The causes of volatility are macroeconomic factors (Interest rate changes, inflation, and economic data) but also specific shocks (Geopolitical events or regulatory changes) and also automatic management algorithms as well as emotional reactions from investors, such as fear or euphoria, which amplify price movements.

The Volatility Index The VIX (Volatility Index), nicknamed the fear index, measures the implied volatility of options on the S&P 500 index. It is a barometer of market uncertainty.

In summary, volatility is a measure of the behavior of investors and financial assets, combining both risk and opportunities. A clear understanding helps investors manage their portfolios in a way that suits their goals and risk tolerance.

• ETF : An ETF (or Exchange Traded Fund) is a fund that replicates the performance of an index, such as the CAC 40 or the S&P 500, and trades on the stock exchange like a stock. Buying an ETF means investing in all the companies in the index it tracks. This is called passive management.

While it offers some advantages, such as reduced costs and ease of implementation, it also has disadvantages. Here are the main ones:

Limiting earnings: By simply following an index, you are giving up trying to beat the market, which could limit opportunities for higher returns. Passive strategies do not allow you to take advantage of market fluctuations or avoid potential declines.

Exposure to market risk: If the overall market or index falls, the portfolio will suffer the same losses without adjustment. No protection against crises: Unlike active management, there is no mechanism to reduce exposure in times of turbulence.

Lack of flexibility: Passive strategies do not take into account economic, geopolitical, or sectoral changes.

Sector concentration: Some indices may be strongly biased in favor of certain sectors, thus increasing specific risks.

Limited returns in inefficient markets: In some less developed or inefficient markets, active management could exploit opportunities that passive management ignores.

Dependence on indices: Indices may include companies that are in decline or overvalued, as they often follow a weighting based on market capitalization.

Automation problem: Following an index can lead to investing more in stocks that are already overvalued or too concentrated.

Lack of personalization: Investors with specific needs (such as different risk tolerance or ESG considerations) may find passive management inadequate.

In summary, while passive management offers an economical and practical solution for market exposure, it is not without risks and limitations. Investors should assess whether this approach fits their financial goals and risk tolerance.