Stocks: A Financial Product with No Principal Guarantee

Interest in stocks is soaring, not just among corporations but also among households. For instance, investment trusts, which hold a significant portion of household savings in stocks, have seen remarkable growth. This itself is a testament to the heightened interest in stocks.
But how are stock prices determined? This is a very fundamental question. A solid understanding of this simple query is the starting point for stock investment.

As a regular commentator for a commercial radio station, I used to discuss economic issues, including finance and stocks, and answer various questions. Among the many questions I received, the following stood out.
“Many stocks fluctuate by 200 or 300 yen. Do a company's performance or the economic situation really change by that much from one day to the next? These large swings make me worried about my stocks. Why do stock prices fluctuate so much every day?”

As people became engrossed in buying and selling stocks, they likely realized the need to understand how stock prices are determined – in essence, the true nature of stocks. This realization is a form of enlightenment, a significant step forward.
Looking at the daily stock market section will never provide answers to these kinds of questions. It's as if the basic knowledge needed to understand economic news is merely superficial. Only by delving deeper, into the 'truth' that lies beneath the surface, can economic news truly become part of us.

This principle applies not only to stocks but to all fields, including finance, fiscal policy, and industry. It holds true for the international economy as well as the domestic one.

Textbook Explanations vs. How Stock Prices Are Actually Determined

Generally, the factors determining stock prices can be summarized as:

● Corporate performance
● Financial conditions
● Foreign investment (movements of foreign investors)

In other words, these correspond to the performance market, the financial market, and the foreign market.

What you should understand clearly here is that stocks are a unique financial product with no principal guarantee. To put it more plainly, they are akin to gambling.

If stock prices moved according to textbooks, no one would ever lose money. But the reality is that it's a gamble, leading to a continuous cycle of losses and gains.
Therefore, it's safe to say that those without financial leeway should not venture into stocks. Please keep this firmly in mind above all else.

That said, there is a kind of formula. Regardless of the era, the most significant factor determining stock prices must be the performance trends of the company.
This is easily understood when compared to everyday life. The price of a good product is higher than that of a poor one.
This is something we experience daily at supermarkets, local fish markets, and greengrocers.

This applies perfectly to stocks. Companies with strong performance receive higher valuations than those with weak performance, and this is reflected in their stock prices. This is the first factor: the performance market.

Regarding the relationship between financial conditions and stock prices, during periods of monetary easing, financial institutions and corporations with surplus funds tend to buy stocks. The market rises due to the relationship between supply and demand. This is the financial market. The opposite occurs during periods of financial tightening.

A Calm Mind, Ample Funds

The third factor, the influence of foreign investors' buying and selling, has become an overwhelming, unignorable presence in the Japanese stock market.
Looking at stock movements in recent years (2006), Japanese stocks only rose by about 7%. Within that, foreign buying accounted for roughly half of the activity.
In essence, it can be said that Japanese stock prices are moved by the buying and selling of foreign investors.

Specifically, when American funds and institutional investors, backed by their immediate capital, enter the Japanese stock market to buy, their significant influence drives stock prices up. Conversely, if they decide to sell, it leads to a decrease in stock prices.

From May 2007, triangular mergers by foreign-affiliated companies became permissible. This means triangular mergers through share exchanges are allowed. However, the Japanese Nikkei average is around ¥17,000, while the US Dow Jones Industrial Average is over $12,000, which translates to approximately ¥1.04 to ¥1.05 million. The scale is vastly different between Japan and the US.

The potential for American funds to launch TOB (tender offers) for companies like Nikko Cordial and Sapporo Beer became a major topic both domestically and internationally. In other words, we must firmly grasp that the actions of foreign investors (including fluctuations in foreign exchange rates) are, in effect, the primary factor driving Japanese stock prices with their sheer force.

In short, I believe those without 'a calm mind and ample funds' should not dabble in stocks. This is something to ponder deeply.