October 21, 2009
Basics of Equity Trading
Equity trading is the buying and selling of company stocks. All public market stocks - option stocks and preferred stock come under equity trading. It involves trade through one of the major stock exchanges. It is very similar to stock trading except that equity trading firms offer in-depth market research, trading systems and trading expertise.
They offer direct trading access which enables better executions. In smaller companies, the stock shares are bought and sold in the OTC (over the counter) markets. Basically, equity trading involves stock trading and more. It requires and involves different securities, diverse strategies, and above all, excellent trading skills. Equity trading necessarily doesn’t involve debt trading.
Equity trading may take place both in domestic markets as well as overseas. At present, electronic matching of buying and selling orders is done on the E-market or the Electronic market. Larger orders may be managed by specialists as in some of the major stock exchanges.
Trading is also done through an agent sometimes, who is authorized to sell and buy on behalf of the share-holder. The agent is paid commission, usually a percentage of the profit by the client/investor.
Principal trading is trading for one’s own individual profit or loss. Major stock exchanges have ‘market makers’ for the maintenance of company stocks. They help in limiting the price variation by trading shares of a company on behalf of other clients along with on their own.
Equity trade firms are setup to trade within larger investment banks. These firms mainly exist in the form of hedge funds. Hedge funds are for long term buying and selling mostly. They are also known to show profit during down market times. On the other hand, investments are subject to high risks. Hedge funds allow investments of any kind including equity trading, bond trading, stock trading, and foreign currency trading, and so on.
Private equity trading firms may or may not allow individual strategies. Either way, the investor must remain profitable consistently. Their major aim is to make best benefit of short-term trading opportunities in the market.
Bid and offer prices are provided by equity markets for each trade. The margin is obtained by market makers who make a profit with the constant buying and selling of stocks by the investors. While preferred stocks may include both equity and debt-like components, equity trading is only concerned with options, warrants and convertible preferred stock.
Equity trading may help you earn profits for a short term as well as for a long term depending upon your plans and strategies. Trading techniques include combining options and stock values, which is known as arbitrage. Another technique is to capture stock dividends using the bought stocks.
Equity trading is usually done with a few basics kept in mind such as one’s capacity. One’s profit may be largely dependent on the risk taking potential of an individual. The higher it is the higher can the profits get. The obvious flipside though, is that it also means a possibility of huge losses.