Equities Trader

Buyers and sellers of company shares on the capital markets

What is an Equities Trader?

An equities trader is someone who participates in the buying and selling of company shares on the equity market. Similar to someone who would invest in the debt capital markets, an equities trader invests in the equity capital markets and exchanges their money for company stocks instead of bonds.

Fundamental Analysis

Before jumping straight into buying company shares, you need to evaluate the financial position of the company and determine whether or not it is a worthwhile investment. Fundamental analysis consists of analyzing financial statements such as a balance sheet, income statement, cash flow statement, or even a statement of retained earnings. If it is, then traders dive more in depth and look at things such as profit margin, quick ratio, and receivables. Anything that can give the trader insight into whether or not the company is performing is looked into and analysed thoroughly prior to an investment decision.

Technical Analysis

The second type of analysis that traders use is technical analysis. This type of analysis involves statistics, averages, past data, volumes, and much more. Some common tools that investors use with this method are correlation, regressions, and inter-market and intra-market prices. All these techniques are used to help the investor in predicting what a stock might do given historic data and activities.

Difference Between Equity and Debt Securities

A lot of people are familiar with equity securities but not a lot of people are familiar with debt securities. People who do not know the difference between the two securities might sometimes classify debt securities as an equity security unknowingly and this is where confusion can occur.

Debt Securities

Debt securities, traded on the debt capital market, consists of: bonds, treasuries, money market instruments and more. They are usually issued with interest which is determined by the ability for the issuer to repay the debt. Issuers that default on their payments often are usually given a higher rate of interest because they are riskier, opposite for those that do not default. Another important note on debt securities is that they are usually held for short-term. This means, these securities are generally not held for more than a year.

Equity Securities

The most well known type of equity securities are company stocks. These are issued by publicly traded companies to shareholders for partial ownership and usually pay dividends after each quarter. These securities also have a the potential for higher return on investment than debt securities but come with added risk. Dividends, although paid every quarter, can vary depending on the company’s performance. The company can also sometimes choose to not distribute dividends at all in periods where they lack earnings to do so. Keep in mind as well that the equity market has been well known for being extremely volatile. This means, equities traders take huge risks when investing which is why they need to constantly do research and analyze the market prior to an investment decision. If you are interested, be sure to check out our article on equity research to gain more in depth knowledge of what equities traders do prior to investments.

Risks

There are multiple types of risks that are involved with equity trading but we will speak about three in particular and these are political, interest, and regulatory.

Regulatory Risk

Regulatory risk refers to the relationship between governments and businesses. As we know, governments have the ability to pass bills or laws which could affect a company negatively. An example of this is governments passing a law introducing a quota on the production of goods in a certain industry. This means, every company affected in that industry will have their production capped and there could be major losses in sales, driving their stock prices down.

Interest Risk

Interest risk refers to rising interest rates which is a problem for businesses that need financing because if interest rates increase to a point at which they are too high, the company is going to have a harder time financing itself. A common point of time for interest rates to begin rising is during inflation because they are seen as a simple resolution. Unfortunately, in this situation, if rising interest rates and inflation both get out of hand, we have created a situation where a company experiences greater financing costs while they earn less due to a depreciating dollar.

Political Risk

This type of risk is extremely difficult to quantify due to limited evidence regarding an individual nation. It can be defined as any risks that corporations or investors face due to political decisions, events, or conditions that significantly affect the profitability of the company. To be more specific, any change in government, legislative bodies, or even foreign policies can be a factor of political risk which severely impacts a company’s profitability. Note that this is different from regulatory risk as regulatory risk involves any rules or regulations that government bodies enact on companies.

Learn More

Equity trading is an amazing field which provides a lot of exciting opportunities for those looking for riskier securities. If you’re ready to dive into the world of equity trading, then make sure to check out these other resources which can aid you in investment decisions: