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The importance of the stock market for the investing world

The importance of the stock market for the investing world

Simon Dalgleish

Simon says


One of the entities that is most mentioned in the financial world, and which I usually address in this space, is the stock market. As is always said, not all investments have to do with shares on the stock market, far from it, but the fact that it is immediately associated with the investment world speaks of the importance it has in this area.

To begin this year's collaborations, I would like to address the issue of its importance, rather than how to invest in it, since it is a topic that I have already touched on before and which you can read about in previous texts in this space. On the contrary, its role in the stock market world and the same weight it has in the financial education of people, is a subject that is rarely discussed, and today I would like to share some reflections on it.

First, what is the stock market?

In a simple way, the stock market is a market where different securities and investment instruments operate and are traded, such as company shares, public and private bonds, certificates, trusts and others. These services are characterized by their security and profitability, which attracts some companies to enter the stock market.

When we talk about companies listed on the stock market, we refer to companies that go to this entity to finance themselves. By going public, they put up for sale a percentage of their company in the form of shares, so that investors, by buying these shares, somehow become "part owners" of a fraction of the company, while the company gets a profit. financing for its operations.

Depending on the numbers presented by the company each quarter, the value of its shares may increase by generating more interest in the market, or decrease by not giving the expected results. Their value can also go up or down depending on the news of the day (eg when news comes out that oil prices are rising, tanker stocks typically go up because they will most likely sell and gain more – and vice versa). ; this is where shareholders can make or lose money, as their investment rises or falls.

Broadly speaking, this is how the stock market works. Understanding it is important to talk about your weight in the financial world.

The Mexican case

One of the peculiarities of the Mexican Stock Exchange is the percentage of shares that companies place on it. Unlike markets such as the United States and the United Kingdom, where companies have on average around 80% of their shares on the stock market, in Mexico the percentage is relatively low, hovering between 20 and 30%. on average.

Why is this relevant? When most of the business remains in the hands of a few (generally, and especially in Mexico, in the family of the founders), the most important decisions are made by them. The company's management and most of the profits stay with this group, with investors getting a relatively small percentage of the company's value.

This situation means that, at least within a group of investors, they may lose interest in investing in the stock market, since their returns are not as attractive, and they make them seek to place their money elsewhere. The value of the company's shares can begin to fall as they do not have investors, and after this, comes the delisting of the stock market, ending their participation.

And then comes the question, why do they go to her in the first place?

One of the reasons is that for them it represents a relatively cheap form of financing, compared to other mechanisms, such as bonds or credits. The equity model, the same one that stock markets operate, charges a proportional percentage based on the returns generated by the companies: if their returns go up, then they pay more, but if they are low, then they also pay less. On the other hand, other models, such as bonuses, have a fixed quota that must be met regardless of the company's results.

The impact of the stock market

All this goes to explain, at least to some extent, one of the reasons why there is little interest in finance in the general population. By discouraging investment in one of the most common and well-known instruments, a general lack of interest in this topic is generated.

As I have mentioned before, in countries like the United States and England, it is common for most people to have some percentage of their capital invested in at least one instrument, and their knowledge of them allows them to make informed financial decisions. This is due to the fact that it is more normal to invest in their respective stock markets, since they represent stable and secure financial growth options, and to a certain extent, with them they gain a small weight within the company, which, although minimal, gives them the confidence that your decisions can help turn these companies around in your favor.

This is a part of financial education where there are still huge areas of opportunity, and that can present great benefits for all participants, including the companies themselves. If awareness of these mechanisms expands, and more people seek to be involved in finance, there is greater potential for growth as there is more capital available for everyone, and this impacts the transactions that can be carried out.

As a purpose for 2022

If this reflection aroused some interest in you, and you have not yet participated in the stock market, I invite you as an experience that this year you place some of your capital, even if it is a small percentage, within this instrument. It can be in shares through ETFs or FIBRAS, two of the instruments that I consider may be useful to you and that are more accessible.

And in general, I would like that —just as I seek to encourage other people to learn more about the stock market and be interested in participating— there is more interest from the population in nurturing their financial education. It is a benefit for everyone and where the main winner will be the one who starts putting their money to work.

The opinions published in this column are the responsibility of the author and do not represent any position on the part of Business Insider Mexico.

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