Disclaimer

This article is for general information and educational purposes only. It does not constitute investment advice, a personal recommendation, or a financial promotion within the meaning of the Financial Services and Markets Act 2000

Readers should make their own independent assessment and where appropriate seek advice from an FCA authorised advisor.

In this part of the series, we will consider some key facts which inform and aid successful navigation of financial markets.

Intermediaries

When large companies raise capital through the issue of bonds or equity, they do so through investment banks. These specialists’ banks help set the offer price/yield and market the offering to institutional buyers such as fund managers and insurance companies.

They also underwrite the offer by taking up any unsold part of the issue.

Of course, they do all this for a fee, which depends on the size of the offer and degree of risk that they will have to buy any unsold stock.

Global Stock Markets and Stock Indices

All the major developed countries have stock markets and taken together stock trading worldwide takes place 24 hours a day during the working week.

In the US, the New York Stock Exchange and NASDAQ Exchange are the major players. In Asia market exchanges include those in Hong Kong and Japan. In Europe those in France, Germany, and the UK.

All these markets have their own indexes. The most important being: –

The Dow Jones which is a price weighted index of the top 30 US companies.

The S&P 500 which tracks around 500 of the largest publicly listed US companies.

The NASDAQ 100 for the top 100 companies listed on this exchange.

In Asia, key indices include the Japanese Nikkei 225 and Hong Kong’s Hang Seng Index.

Europe’s major indices are the Paris CAC40, Germany’s Xetra DAX and London’s FTSE 100.

Finally, there is a Global Index, the MSCI Inc World Index (formerly the Morgan Stanley Capital Index). This consists of large and mid-cap companies across the twenty-three most developed countries and covering 85% of the free float capital of each country.

Faith in the System

During the recent history of global economics, a profound change took place in 1931 in Britain and 1933 in the US. This change was their departure from ‘The Gold Standard.’

Following the Great Depression in the US and in the aftermath of WW1 a vast expansion in monetary supply was needed. This could not be achieved when money supply was linked to limited gold reserves.

What followed over the next decade was the emergence of ‘fiat money’ a process whereby the printing of money is linked to a country’s economy and faith in their government. In 1971 the US announced that the US $ would be backed in this way.

The modern financial system largely relies on the belief  that major developed nations will continue to honour their debts and support their currencies. Various wars and other crises, including the COVID-19 pandemic, have so far validated this faith.

Market Corrections

From time-to-time markets may get ahead of themselves and become too highly valued. Events, sometimes major sometimes small, will trigger a sell off which can spread from one sector into the whole market and from one country to the rest of the world.

Technical traders will regard a fall of 10% in the value of a market from recent highs as a market correction.

Each major index has trigger points and when these are breached on the way down the fall usually continues down to the next point and so on.

If you are investing for the longer term and have good underlying assets consider holding on until the markets rise again.

Corrections are a necessary and fundamental part of market dynamics.

It is a fact that market and market sector trends, both up and down, continue for longer than you might imagine.

No Straight Lines

If you look at a price chart, covering a brief period, for any company share, ETF, or equity fund, you will see a series of peaks and troughs in its daily price. Look at the same entity over a longer period and these will smooth out to show trends.

These daily changes reflect investor’s buys and sells and include profit taking by professionals. Weak holders will also sell, and this is welcomed as it builds a firmer base to the investment.

Professional V Amateur Investors

Investors fall into two main categories professionals and the public. Professionals invest as a career and take pragmatic, non-emotional views when investing.

Public investors in the main are driven by two emotions, fear and greed. They will often get in late (Greed), when the best gains have been made. Having bought at too high a price they then sell as prices continue to fall. (Fear) Often this means taking a loss especially in a single company holding.

Professionals will spot a rising trend early and buy at a low price and sell early on a falling trend often to the public who are just getting in.

This mass psychology provides profitable entry and exit points for the professional.

A rising tide lifts all boats

This saying is another mantra in the investing lexicon. It means that with rising financial markets all asset prices increase but not at the same rate. Beware of poor relative performers.

Of course, the opposite is also true when the tide goes out everything falls.