Introduction to the Stock Exchange and Securities
The Stock Exchange and Its Features
The Exchange is a vital institution within the financial system, essentially functioning as an organized market. Professionals regularly gather here to buy and sell securities, both public and private. The primary market deals with new securities, while the secondary market (the stock exchange market) handles existing securities without generating new ones.
Key Features of the Stock Exchange:
- It’s a regulated market where approved securities are traded.
- Securities are sourced from institutions admitted to trading.
- Transactions are legally and financially secure.
Participants in the Stock Exchange:
- Capital providers (investors): Seek to profit from their capital with minimal risk.
- Mediators: Facilitate transactions between investors and the market.
Mediators in the Stock Market
Securities Companies:
These are corporations with exclusive social order, limited to functions defined by the Securities Market Law. They are the most comprehensive brokers, able to exercise all stock functions permitted by law. They can act as employees or on their own behalf, invest in securities underwriting, and provide credit for security sales.
Features of Securities Companies:
- Engage in the stock market and channel orders from investors.
- Operate as foreign exchange delegates.
- Lend securities in operations.
- Underwrite securities and mediate financial transactions.
Brokers:
Brokers can only act as employees and cannot provide credit for purchases or underwrite securities. They are structured as SAs with exclusive social order, limited by law.
Features of Brokers:
- Receive, transmit, and execute orders.
- Trade securities not admitted to the official listing.
Objectives of the Stock Exchange
- Facilitate the exchange of funds.
- Provide liquidity to stock market investors.
- Establish security pricing.
- Provide information to investors.
- Publish prices and traded quantities.
Share Trading
Securities can be admitted for trading in the official market or the secondary market for medium and small businesses. Admission can be simple or qualified.
Simple recruitment requires a minimum nominal capital, a specific number of shareholders, and a certain profit percentage. If these requirements aren’t met for two consecutive semesters or three alternate semesters within six, the Exchange may suspend trading.
Characteristics of Fixed-Income Securities
- Profitability is typically higher than the CPI (Consumer Price Index).
- Price changes consider the IRR (Internal Rate of Return).
- Interest rate risk exists if the holder liquidates before maturity.
- The degree of liquidity in secondary markets is a factor.
Value of Fixed-Income Securities
- Face value: The value printed on the security.
- Emission value: The amount at the time of operation (can be at par, above par, or below par).
- Cash value: The price at the time of purchase on the Exchange.
- Redemption value: The price at maturity.
Return on Fixed-Income Securities
- Gross return: The total income stream without deducting expenses.
- Net performance: Gross return minus expenses and taxes.
- Previous nominal return: Relates to the initial investment.
- Effective yield: Compared to the purchase price of the security.
Characteristics of Public Debt Securities
- Created in series with identical rights and ease of transfer.
- Guaranteed by the government, offering maximum security.
- Often provide significant tax advantages.
- Risks are lower than private securities.
Treasury Bills
These are the most important assets by volume, sold through auctions to the highest bidder. They regulate the money market and raise funds for deficit reduction. They are exempt from income tax and issued at a discount (interest deducted in advance). The gain is the difference between the nominal and actual value. They can be purchased through auctions or the secondary market.
Debentures and Bonds
Bonds mature in 10 or 15 years, with a minimum nominal value of €60. Interest is payable annually but subject to withholding tax.
Bonds have a duration of 2 to 5 years, a minimum amount of €60, and are subject to income tax and IS (corporate tax).
Private Funds
Security issues cannot exceed total social capital reserves.
Debentures are fixed-income securities issued in series, carrying a fee and entitling the holder to agreed-upon interest payments and repayment of the invested amount.
Investing in bonds is generally safer than stocks because bondholders are prioritized for capital recovery in case of company dissolution. Corporate bond yields tend to be higher than public bond yields and are subject to income tax.
Kinds of Duties
Securities can be simple or guaranteed.
Based on the currency board, we can distinguish between:
- Classical non-convertible: Cannot be exchanged for shares.
- Convertible: Can be exchanged for shares.
- Exchangeable: Can be exchanged for shares, but not from a capital increase.
Based on interest, they can be:
- Constant: Fixed interest rate.
- Variable: Interest rates may vary based on factors like inflation.