When we think of the stock market, speculation often comes to mind, incomprehensible terms such as SWAP, PUT and CALL, or even the subprime crisis. However, the stock market is not only that!
What are the financial markets for?
Financial markets play a fundamental role in financing the real economy by ensuring a dual function:
1) It is a place of business financing (issue of shares or bonds). In the primary market, companies with financing needs are linked with agents with financing capacity (supply of capital). Companies issue securities on the market (owned or borrowed: shares or bonds) against equity to finance their activities.
2) It is an investment place (investors). In the secondary (or second-hand) market, companies’ securities can be freely traded between buyers and sellers (companies, individuals, banks, etc.) but they do not pay anything back to the company.
Financial markets are therefore an alternative means of financing bank credit, enabling companies to build long-term savings to finance their development and activities and to diversify their sources of financing.
How are investors doing?
An action is a title deed on the one hand of a company. The remuneration is in the form of dividends if the company realizes profits. It is therefore a risky investment (variable and not certain gains) since the return on investment depends on the performance of the organization. The owners of capital will decide to buy shares of a company if they believe in its ability to develop and create wealth.
How are things on the corporate side?
The capital raised on the markets can have several uses: to renew the apparatus of production or to enlarge it, to realize an external growth, that is to say to buy one or the competitors, to diversify its activities or to be delevered.
Shareholders of the company (share holders) can have control and shareholding power in the strategic and operational decisions of companies if they have a sufficient share of the company’s shares. Otherwise, they only receive dividends.
What are the limits ?
Only large corporations today have access to financial markets. To be able to enter the stock market and issue bonds one must have already reached a critical size. Markets are therefore not a solution to the financing problems of SMEs (small and medium-sized enterprises) and individual entrepreneurs.
In addition, the game of supply and demand in the secondary market sometimes creates a disconnect between the fundamentals (performance) of companies and the level of their stock market values, which contributes to the emergence of financial bubbles and maintenance. instability of the system.
To make a small point in image on the financing of companies by the financial markets, find the video of “draw me the economy” at the following link: