Perhaps the first decision to be made by any saver about to make an investment is exactly how much risk he is willing to assume or, in other words, the level of profit/loss to apply to his investment. The risk/return profile of each individual depends, among other factors, on age, psychological make-up, the horizon over which the investment is to be made and the portion of income available for saving.
It is particularly important to define the term of the investment. Studies on different markets, Spain’s included, have shown that equities are a safe and a profitable investment in the long term. Assuming long enough periods, of 10 years or more, a diversified portfolio of shares provides superior returns to those of any other financial asset.
How to invest
Investment decisions are not only about what, when and how much to invest but also about selecting and using the most suitable channel.
The most direct route into the stock market is through the so-called market members. These intermediaries, specialising in equity investment, are the only entities qualified to buy and sell directly on the market.
Other financial entities are empowered to administer securities, manage portfolios or process orders through to market members, but not to intervene directly in the market. Banks and savings banks, with their extensive branch networks, have a direct line to the widest number of investors. But other intermediaries, like portfolio managers and commercial brokers, can also receive orders from clients and forward them to market members for their execution.
The first step for the investor is to approach one of these intermediaries and open a securities account. This is the account through which the investor’s securities portfolio will be administered (purchases and sales, subscriptions, dividends, attendance at Shareholders’ Meetings, etc.). It will also form the basis for cash movements arising from market transactions.
Before formally opening a securities account, check out the fees you will be charged and the scope of the intermediary’s service delivery (type of orders, ordering procedures: via internet, telephone, etc).
Investors may also wish to supplement this administration function with more in-depth advice. For this reason, intermediaries offer the possibility of subscribing management contracts whereby it is the intermediary which decides on the purchase or sale of specific securities depending on market performance and the investment guidelines agreed with the client. Naturally, this service means paying a higher fee than for the simple administration or custody of securities.
The client must be furnished with information on all transactions executed, the economic rights accruing to securities and financial operations affecting the same, alongside quarterly and annual statements on the composition and value of his portfolio.
Once a securities account has been opened and sufficient funds advanced, the client can issue the relevant purchase and sale orders. These orders must invariably be clearly worded and specify certain conditions: identification of the investor and type of security, the direction of the order (buy or sell), the validity of the same, and the execution price and volume. Unless the client indicates otherwise, the assumption will be that the purchase-sale should be effected at the best price available on the market and that the order will stand until the end of the session in progress.
Formalisation of the order triggers an extraordinarily rapid process of execution and confirmation. Current technology means that any investor, regardless of his whereabouts, has the same opportunities to buy or sell on the market. The routing systems installed by securities broker-dealers and most other financial intermediaries ensure that order details reach the continuous market operator in a matter of seconds. This operator will then check the data and enter the order in the Spanish Stock Market Interconnection System where it is matched with an opposing order in tenths of a second. This sets in motion an informational flow whereby the transaction is confirmed with the investor. In the case of securities listed on the continuous market, the whole operation will take just a few seconds, provided the investor is willing to buy or sell at the market price.
Immediately following transaction execution, the intermediary will prepare the settlement details. Settlement is the process of securities delivery against cash payment attendant on any market trade. All data on the trade, together with the pertinent settlement instructions, are transferred from the Bolsa to IBERCLEAR (Securities Clearing and Settlement System), in charge of registering securities and settling stock market transactions. This entity also checks that all system participants (securities broker-dealers, banks and savings banks) concur with the settlement details. It then enters the securities with the institution designated by the client and sends instructions for the corresponding cash amounts to be debited or credited in the accounts which entities hold for this purpose at the Banco de España.
Starting from this analysis, and preferably with the assistance of a professional, the investor must next decide which products will make up his portfolio and in which proportion, so his investment fits his particular profile.
Fortunately, the Spanish market provides a wide choice of products and securities, which ensures investors the right combination to suit their expectations.
Among the most popular investment products on the market are: shares, mutual fund unit-holdings, bonds, bills and other fixed-income assets.
One of the guiding principles for choosing your portfolio products and securities is diversification, that is, not concentrating your investment in just one or a few securities.
Another concern is the liquidity of the investment, since not all products or securities can be readily disposed of when the investor wishes. The liquidity of a security depends on its trading frequency and volume; the more days a security is traded and the greater its trading and cash volume, the more liquid it will be.
The last point on the investor’s basic checklist should be the tax treatment of the investment. Generally speaking, equity investment has an advantaged tax treatment provided its time horizon is sufficiently long.
Investors must bear three types of costs on transacting in the Spanish stock market: the fees charged by the entity or intermediary used, Bolsa trading fees and the settlement fees of IBERCLEAR. This is on top of the administration or custody fees payable to the securities account administrator.
Investors must bear three types of costs on transacting in the Spanish stock market: the fees charged by the entity or intermediary used, Bolsa trading fees and the settlement fees of IBERCLEAR. This is on top of the administration or custody fees payable to the securities account administrator.
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Brokerage fees
The fees applied by stock market intermediaries have been free and negotiable since 1 January 1992.
Intermediaries are legally obliged to display their prices to the public and notify them to the CNMV (National Securities Markets Commission). The investor will thus be fully informed, from the outset, of what his equity investment will cost.
For individual investors, brokerage fees generally run from 0.2% to 0.3% of the cash amount of each transaction; among the cheapest rates worldwide. Logically, these fees may also be substantially lower for larger transaction and cash volumes.
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Bolsa trading fees
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The securities administration or custody fees charged by the broker-dealer, broker or bank holding the securities account are usually between 0.15% and 0.25% p.a. of the nominal value of the securities on deposit. This is incremented by charges for specific operations like dividend collection, the subscription of new securities, bond conversion, etc.
All these costs must be clearly specified in the administration or deposit agreement concluded with the client on opening the securities account.
The investor may change any feature of an order introduced but not yet traded, except the direction (buy or sell) and the security specified. However, price alterations or volume increases will incur a loss of priority.
The unfilled portion of an order or set of orders may be cancelled.
The term of an order may also be specified on entry: valid for the trading session in progress, valid to a certain date and valid up to 90 days.
Investors in the continuous market can place their orders:
By price and by conditions.
By price
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Limit orders: buy or sell orders issued with a price limit. Buy orders cannot go through at higher than the price limit set, while sell orders cannot go through at any lower than the limit set. A limit order is executed immediately, if a counterparty can be found at the specified price or better. In the absence of a counterparty, or one with sufficient volume, the order or the unfilled volume of the same will be held in the order book until a counterparty is found.
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Market orders: order to buy or sell a security at the best available price
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Market to limit orders: introduced without a price limit and executed at the best counterparty price.
By conditions
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Execute or kill: the volume of the bid unfilled on entry is excluded by the system
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Minimum execution: subject to the pre-condition that if a specified minimum volume is not traded on entry, the whole bid is excluded by the system.
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All or nothing: a special variant of minimum execution orders, in which the minimum coincides with the total order amount.
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Hidden volume: part of the volume assigned to the order is not disclosed to the rest of the market, but is fed in progressively as the visible portion is traded.
Plentiful and timely information to the investor public is an essential prerequisite for market transparency as well as a key driver of long-term success. The maturity of a market can be measured by its transparency and liquidity, two concepts which are closely interrelated.
The Securities Markets Law enshrines transparency as one of the foundational principles of the Spanish market. Its article 35 stipulates the information to be provided by issuers admitted to trading. A Ministerial Order of 18/1/91 regulates the content and form of such published information. Royal Decree 726 of 23/6/89, in its article 14, makes it incumbent upon stock exchanges to disseminate information on market operations, using the most appropriate media in each case. A number of Bolsa and CNMV circulars go into greater detail on the reporting requirements of market participants. Information, accordingly, is one of the securities market issues meriting most regulatory attention.
From the vast amount of data available, we can single out certain variables with a major bearing on listed companies’ prices. Firstly, company earnings and current interest rates, secondly, the international economic setting and, finally, the political and social climate prevailing.
Stock markets value companies on a daily basis using objective means. This valuation is based not so much on the present or past situation of a company as on its future earnings capacity. The market values expectations and translates them daily into real data.
The periodic release of company results and their comparison with past earnings and those of sector comparables provide a basic pointer for investors. As analysts generally arrive at their fair-value estimates by discounting future financial flows, the profit forecasts provided by companies should be read alongside the estimates published in research reports.
Interest rate conduct is another key determinant of stock market performance. Remember that, as a general rule, interest rate rises push down the prices of listed shares and vice versa.
A country’s economic climate both influences and is influenced by the performance of its corporate sector. Investor sentiment as regards the likely evolution of the country’s economy as a whole prompts buying or selling trends in the market which pressure prices upwards or downwards. This economic setting can be tracked via the macroeconomic data published on a regular basis by various organisations. Unemployment figures, inflation rates, consumer behaviour, corporate order books and numerous other indicators have to be factored into stock market forecasting.
Investments in business projects require a framework of stability and confidence for their long-term development. Uncertainty is the enemy of investment. When political and social circumstances preclude a reasonable stability in economic policymaking and corporate sector regulation, companies hesitate to make the investments needed to build up their competitiveness and profitability. In short, macro and microeconomic data and the conduct of international markets must be analysed in the context of a country’s particular political and social juncture.