Equity trading is one of the most common methods of investment, accessible to both individuals and institutional investors alike. This method of trading typically consists of the buying and selling of shares or stocks of publicly traded companies on the stock market.
Through equity trading, any individual can own a small portion of a company. This carries many potential benefits as well as certain calculated risks.
In this article, we will explore the many factors surrounding the world of equity trading. In addition to taking a closer look at what equity trading is exactly, we will also explore the many ways you can trade equities, as well as learn about the many risks and benefits attached to trading.
Read on to find out more about how to trade equities.
What is Equity Trading?
Simply put, equity trading is defined as the buying and selling of company shares, otherwise known as equity, in financial markets. This equity can be considered as a small portion of the company itself, making the shareowner entitled to its future profits and growth.
There are multiple reasons why an investor may choose to engage in equity trading. For some, it is only about generating returns on their investment through capital growth or dividends.
Others may trade to expand their investment portfolio or gain exposure to financial markets. Overall, it is an important aspect of financial markets, as it provides liquidity while allowing investors to participate in the ownership of publicly traded companies.
Equities vs Stocks
Both of the terms “equity” and “stock” are often used interchangeably. At face value, they can be considered synonymous, as both are used to refer to shares of a company that can be owned by an investor. However, there is a minute difference between the two, which can be more obvious depending on the context.
To put it simply, all stock is equity. However, not all equity can be considered stocks. This means that equity is a broader term that can be used to describe any form of ownership. This includes any other tangible assets.
Stocks, on the other hand, are those shares that are specifically traded on stock exchanges. If a share cannot be bought or sold to transfer company ownership, it is not considered stock.
How to Trade Equities
There are multiple ways an investor can trade equities. Some of these strategies are longer and more time-consuming, while others require minimal effort and yield results quickly. Which method is best depends on factors like type of market, trading goals, and investor experience. The following are some of the ways you can trade equities.
Day Trading
As the name suggests, day trading refers to the buying and selling of securities within the same trading day, in an attempt to gain profits based on any short-term changes. Although this type of trading may offer quick rewards to investors, it is also one of the most challenging to master, as one must be alert and attentive at all times for even the slightest of fluctuations. Day trading is a common strategy used to trade in volatile markets, where the price of shares changes rapidly.
Position Trading
Position trading is the opposite of day trading, taking on a long-term approach. In this type of trading, investors overlook short-term fluctuations and base their decisions on deep analysis of company conditions and economic trends. Position traders hold their equities anywhere between a few weeks to multiple years before making a decision.
Scalping
Similar to day trading, scalping is another short-term trading style in which the investor aims to make a fast profit off small price fluctuations. However, the difference between scalping and day trading is that the former is even faster, with deals opening and closing in minutes, if not seconds.
The goal of a scalping-style investor is to make multiple profitable trades throughout the day, resulting in an accumulation of gains. However, this is also a risky strategy, as one large loss can negate all previous profits in one go.
Swing Trading
While day trading is rapid and fast-paced, and position trading is slow and calculative, swing trading is in the middle. Typically spanning between a few days to several weeks, swing trading involves careful analysis of technical indicators like charts and graphs on company trends.
The goal of swing trading is to capture a price swing, where maximum profit can be achieved. This can be a tricky way to trade equities, requiring ample patience, risk management skills, and experience.
Algorithmic Trading
One of the newer trading methodologies is algorithmic trading, colloquially known as algo trading. This strategy relies on computer-generated software to execute trades based on pre-set instructions.
These special algorithms are programmed to factor in variables like price and timing and analyze market data before executing trades at high speeds. Algorithmic trading is a futuristic way to trade equities and has been embraced by many investors since its introduction.
Benefits and Risks of Equity Trading
Benefits
Equity trading offers a variety of benefits if the investor is successful in their efforts. This motivates many individuals to invest in equity shares despite the many risks that are associated with it. The following are some of these benefits explained:
- Ownership in Companies: The owner of an equity share becomes a partial owner of the company itself. This allows them to have a say in company matters like operations, financial decisions, and voting.
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- Capital Growth: Once an investor acquires a share, they will then attempt to trade it on either stock exchanges or over-the-counter markets. If a shareholder can sell their share or stock for a higher price than what they bought it for, they can make a profit. This is known as capital growth and is the most common method for generating returns from equity trading.
- Dividends: Sometimes, companies distribute the profit that they make amongst all their shareholders. These profits are known as dividends and are the easiest way to generate a return on equity. Dividends are typically distributed bi-annually by larger, more established companies. The payout of a dividend depends on the performance of a company, with a greater performance resulting in a larger amount being sent out.
- Portfolio Diversification: Holding equities of multiple different companies can help diversify your portfolio, as well as increase the chances of profit generation. Even if some of your shares do not perform well, other successful ones can make up for it, giving you multiple benefits in the long run.
- Liquidity: An equity market typically experiences a high volume of trading, with investors buying and selling shares at any given time. As stocks are considered liquid assets, being involved in equity trading will help continue the cycle and facilitate efficient market transactions.
Risks
Ownership of any asset is susceptible to potential risks and downfalls. Equity trading is no different, coming with a plethora of risks that an individual must understand before starting their investment journey. The following are some risks explained:
- Market Risk: Just like any physical market where goods are bought and sold, the stock market is also susceptible to the influence of external factors. These include economic setbacks, geopolitical events, and climate conditions, where market change is beyond an individual’s control. All these factors run the risk of altering stock prices and market conditions.
- Volatility Risk: The stock market is notorious for being unpredictable, with stock prices fluctuating at unprecedented times. Not knowing how your shares will perform in the future is a risk that every equity trader takes before buying an investment. Sometimes markets are so volatile that there is no telling how the stock will perform in the long run.
- Systemic Risk: Systemic risks are those associated with the entire financial system collapsing, resulting in severe market instability and economic crises. Although rare, such an event is usually unprecedented with many long-term effects. An example is the 2008 financial crisis in the United States, which impacted the stock market all over the world, resulting in a global economic recession.
FAQs
What is the best time to trade in equity?
Although there is no set answer for what time you should trade in equity, experts say to do so in the first and last hour of a trading day. This is because the market is busiest during these times, allowing for many more trading opportunities. This is in contrast to the middle of the day when markets tend to be much more stable with limited fluctuations.
Which month is the worst for the stock market?
According to the New York Stock Exchange Composite, January, February, June, August, and September are the worst months for the stock market. This is based on data spanning the last 20 years from 2004 to 2023.
Which month is best for the stock market?
The best months according to NYSE Composite for the stock market are April, July, October, November, and December.
All the information made available here is generally provided to serve as an example only, without obligation and without specific recommendations for action. It does not constitute and cannot replace investment advice. We therefore recommend that you contact your personal financial advisor before making a purchase decision.
