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Gerard Moore 19 / May / 22

What do stock market traders invest in?

Main financial instruments
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Stocks, bonds, mutual fund securities, derivatives, structured products, etc.: The financial instruments you can invest in in the stock market take many forms. They are more or less difficult and more or less risky.

Let's talk about the stock market: are you familiar with financial instruments? The rules define them as “names. and financial contracts” (1) . These are products issued by companies, the government, or even collective investment enterprises that can be sold in the markets (they are not all listed). Equity securities, debt securities, FCP or SICAV units or shares, derivatives, structured products, various types of financial instruments. It is also necessary to distinguish complex products from simple ones. To help you better understand the situation, let's define the most common financial instruments together.

(1) Article L211-1 Monetary and Financial Code

Warning: investing in the stock market carries the risk of losing capital, regardless of the financial instruments used.

Equity securities: shares

Shares are one of the most famous exchange-traded financial instruments. By purchasing this type of security, you become the owner of a share of the capital of the company that issued it. With this acquisition come rights: the right to dividends (you get your share of any profits generated by the company) or the right to manage (at general meetings you can vote and therefore participate in decision-making regarding the company).

Stocks are risky financial products. Their price fluctuates depending on market movements. And if the issuing company ever goes bankrupt, you could lose all your investment.

Debt securities: bonds

Other important financial instruments in the markets: bonds. These securities represent shares in loans issued by the government, government agencies or companies. When you buy a bond, you provide funds to the entity that issued the security. This allows you to collect interest. At the end of the borrowing period, your share is returned to you, unless the issuer goes bankrupt.

Bonds are products that carry risk during their life and at maturity. There are several risks to be aware of:

That your investment will not be returned in the event of default by the community or the issuing company.

Also, bond prices can fall if key interest rates rise (which is a problem if you want to sell your securities before they mature).

OPC: SICAV and FCP securities

UCI (Collective Investment Commitment) is a collective investment that allows you to invest in a diversified portfolio of stocks, bonds, etc.

UCIs invest in transferable securities (stocks, bonds, etc.) on behalf of a large number of depositors. By purchasing a UCI share, you gain access to a diversified portfolio managed by a professional (approved management company).

In exchange for your money, you do not hold securities on the stock exchange directly, but accumulate shares of mutual funds.

Collective investment enterprises mainly come in two forms: SICAV (variable capital investment companies) and FCP (mutual funds).

The degree of risk associated with mutual funds is more or less high. It depends on the investment strategy of SICAV or the investment fund. For example, cash UCIs pose less risk than UCIs that are primarily equities.

Derivative financial instruments

Derivative financial instruments or derivatives are linked to underlying assets (stocks, bonds, commodities, currencies, etc.). They are tools to hedge the risk of fluctuations in their underlying assets (changes in exchange rates or interest rates, volatility, etc.). By subscribing to a derivative product, you acquire the right or obligation to buy or sell the underlying value at a specified price and within a specified period of time.

The most common derivatives include futures, options, turbochargers, certificates, contracts for difference (CFDs), swaps and warrants.

These financial products are very risky and are intended for well-informed investors. In any case, they should not make up the majority of your portfolio.

A few words about ( ETFs or trackers ): these instruments, which mimic the operation of stock market indices, work a bit like derivatives (indices act as an underlying component).

Structured financial products

Structured products are financial instruments that combine several assets: traditional financial investments (stocks, bonds, etc.), derivatives, underlying assets. The advantage of structured products is their flexibility: they can be tailored to the market context and your needs as an investor (in terms of investment strategy, your risk profile, expected return, etc.) .

Structured products are in most cases issued in the form of EMTN (medium-term euronotes = medium-term non-guaranteed capital bonds).

Like derivatives, structured products are risky investment decisions that you must learn the ins and outs of.

Complex and non-complex financial instruments

Classifying financial instruments by their nature is not the only way. they can also be divided into two large groups: simple financial instruments and complex financial instruments.

You can buy and sell simple financial products even if you don't have deep knowledge of the markets. These are "regular securities" such as common stocks and bonds, or units and stocks of certain UCIs.

Trading in complex financial instruments, on the contrary, requires experience in investing in the stock market. We are talking about complex or atypical products, the cost of which can vary depending on many factors (other than supply and demand).

These are bonds with indefinite maturities, stocks listed on unregulated markets, UCIs investing in alternative funds, risky FCPs, etc. Without forgetting derivatives and structured products (in general, because some of them can be considered uncomplicated ).


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