Guide To Equity Trading: How to Become an Equity Trader in 2021
What Is Equity Trading?
An equity represents a value in a business. It can be shareholder equity, in a public company, or owner equity in a private business.
Thinking of equity as pro-rata ownership of the company can be a useful way to understand that equity is essentially a catch-all term for things like stocks, shares and derivatives based on a company’s assets.
You can trade equity in several different ways. Stocks, shares and derivatives can all be traded on stock markets, and there is an organized stock exchange for every country – in the US, there is the New York Stock Exchange (NYSE), and, in the UK, it is the London Stock Exchange (LSE).
Traders can use exchange traded funds (ETFs), which are diversified portfolios that spread the investment risk in different countries and industries. This gives traders the direct ownership of an underlying asset, as well as receiving any loss, profit or dividends.
The underlying asset does not change ownership, and profit (or loss) is based on the performance of the equity.
Share purchases give investors profit in two ways:
Dividends – Twice a year, the business distributes profits made to shareholders, depending on the amount of equity they hold. Dividends tend to be paid more reliably by larger, well-established companies.
Capital growth – The selling of equity for a higher price than it was bought for is capital growth and is part of the active trading market (to allow others to buy).
How Does Equity Trading Work?
A business can be listed on national stock exchanges, and traders can then buy and sell equity of that business both nationally and internationally through investment funds, via online trading platforms, or through their bank.
What Are the Different Types of Equity?
- Large-cap – This is sometimes called ‘blue chip’ equity, and is from large, well-established companies. Large-cap equity offers regular dividend payments and a steady growth, which is good for traders selling later.
- Mid-cap – Investment in medium-sized companies can be slightly riskier, and while dividends can be paid regularly, there is more potential for faster growth.
- Small-cap – This is the riskiest type of equity, with small businesses rarely paying dividends, but if the company is successful, the capital growth can be phenomenal.
What Affects the Cost of Equity?
There are both macro and micro reasons that can affect the cost of equity.
The movement of the market can change depending on what is happening elsewhere.
With serious natural events like hurricanes and earthquakes causing market uncertainty, as well as global problems like the 2008 economic crash, if the general economy is going down, it is likely that the price of equity will go down too.
Every company that is listed on the stock exchange must publish their financial results once a year, and a company that is performing well and growing will attract higher equity prices.
The demand for equity can influence the price. For equity in less popular businesses, there is not as much demand, so the prices are lower.
For more popular companies, the demand for equity means that traders are willing to pay more – and prices go up accordingly.
There are limited equity options available for companies listed on stock exchanges, and when it is difficult to buy equity, prices will rise.
The other side of this is that newer or less well-established businesses have more equity available and are usually cheaper.
What Are the Risks of Trading Equities?
Trading equities has risks, like other trading activities, and the most obvious risk is loss of your capital and all the money you have invested.
Adverse price movements, whether caused by the general economy or because of poor performance of the company, is the main risk for investors.
This can be amplified if the investment is leveraged, such as through CFDs or margin trading.
It is understood that emerging economies are more volatile, so it is considered riskier to choose to invest in a business that is not in an established market.
Equity trading is about speculation, and the risk of allowing emotion to dictate how you trade or invest can lead to you making rash decisions – and this can be risky, especially in volatile or turbulent market conditions.
What Do Equity Traders Do?
Where Equity Traders Work
When you think about equity trading, you may imagine a busy trading floor at NYSE or LSE, filled to the brim with shouting, gesturing and busy people.
However, although several equity trading roles take place on trading floors, there is a growing trend for traders to work from home through online trading platforms.
Investment banks and trading firms might work independently of the stock market floors, but they do have similar roles and behave in a similar way.
The Day-to-Day Life of a Trader
One of the most attractive things for people looking for a role as an equity trader is that every day can be different.
Research and Analysis
Equity traders need to know what has happened through the night and during past trading hours and apply this research to their analysis. They then use this to decide when to buy or sell, and what should be trading.
Different instruments, whether shares, options, futures or derivatives, need to be treated slightly differently to make money, and equity traders need to form coherent and profitable strategies for clients.
Trades are made on behalf of clients, and part of the work that needs to be done is ensuring that investors know what they are investing in – and why. Providing concise reports and giving advice is an essential service.
Forming Business Relationships
Trading is as much about selling as it is about working the market.
Business relationships, both inside and outside the trading floor, are an important facet of the role. New investors need to be encouraged to become clients, and wining and dining clients can make more money.
Different Types of Trading
There are several different types of trading, and equity trading desks are usually based on one or more.
This form of trading is the ‘norm,’ the basic trading of equity in mainstream businesses.
This is also where automation is strong – with algorithms able to take on the speedy reactions. Cash traders can use their strong market instinct in conjunction with great mental arithmetic ability to make decisions based on real-time events.
For clients who are investing using spread betting or other instruments that rely on price movement, the derivatives trading desk is for those who are great with quantitative analysis and can form strategies based on quick calculations.
More complicated than basic cash trading, exotics tend to have extra features above and beyond the ‘strike price’ (the buy or sell price) and the expiry date (when the position will automatically close).
Exotic trades need more work from the trader, as each one needs to be accurately priced with a created structure – and this is usually managed by the equity trader on an ongoing basis.
What Is It like Being an Equity Trader? What Are the Pros and Cons?
Working as an equity trader is not for everyone, and there are several pros and cons about the general role that could help you decide if it is for you.
Above Average Pay
Equity trading has above average pay compared to other financial roles – in 2018, the US Bureau of Labor Statistics reported a median salary of $64,120 for professionals in the category of securities, commodities and financial services sales agents, which includes equity traders.
In most cases, entry level analysts can expect to earn at least $75,000.
The nature of making decisions on the fly and using math, analysis and communication means that working in equity trading is intellectually stimulating.
The fast-paced nature of the market means that equity traders are always busy – and this can be fun and rewarding for those who like to be busy.
Make Your Own Decisions
Once you have cut your teeth and proven your performance, then as an equity trader you are not often under direct supervision.
This means that you are mostly self-directed and can make your own decisions.
Although the market is usually only open between 9:30 a.m. and 4:30 p.m., long working hours can mean traders are in the office at 6:00 a.m. and entertaining clients late into the evening, too.
Limited Time Outside of Work
The overwhelming business of the trading floor can mean that the role is often consuming, leaving limited time for a social life or anything else.
Lots of Pressure
There is great pressure to perform – traders are expected to maintain a high volume of trades, with great focus on profit and positive outcomes.
You May Be Based in a Big City
Although many traders are now starting to work more remotely, trading floors are usually based in major cities, which can limit your housing choices.
What Are the Key Skills Needed to Become an Equity Trader?
Knowledge of the Market
To be successful in equity trading, you need to have a keen interest in, and extensive knowledge of, the financial markets and general economy.
Critical Thinking and Decision Making
This might seem a bit obvious, but you need to be able to make fast decisions under pressure to be successful on the trading floor.
Critical thinking and the ability to work with limited information logically to decide when to buy, when to sell and work out what is coming next are essential skills in equity trading.
Being able to forecast movements in the trading instruments using past data, market sentiment and financial news comes from a technical analysis skill.
Looking at the economic performance of a business is an analysis that works from the macro level through to the micro level and is important for equity traders because it can show how equity should be priced – and give an indication of future performance.
Fundamental analysis goes from the state of the economy to the strength of the industry, and then, finally, the individual company performance.
Managing portfolios means being able to juggle the needs of clients and investors while creating strategies on diverse trading instruments. This also includes choosing the right trading instruments in the first place, as well.
There is always risk in trading, and one of the most important skills is recognizing, evaluating and managing risk.
In equities, you must be aware of risks that could come from financial insecurity, human mistakes and more modern issues like data-related threats.
Successful equity traders need to have a great deal of soft skills, and while these cannot necessarily be learned in school, college or university (unlike the ‘hard skills’ listed above), they can be improved.
Having great communication skills means that traders can advise clients and network efficiently.
Math skills, from quick mental calculations to understanding charts, are obviously needed, and these go hand in hand with effective analysis skills.
With the growing automation of the trading industry, using technology, and especially programming, are an important addition to the skill set of a successful trader.
Creating algorithms, making apps and developing software programs are becoming part of the role for some equity traders.
What Qualifications Are Needed to Become an Equity Trader?
For most roles, even entry-level, you will need at least a bachelor’s degree, preferably in finance, economics or business.
This is a broad requirement, but a degree in these subjects will also provide some background knowledge and skills like analysis and risk management, for example. An MBA is also a great qualification to set you apart from other applicants.
Registering with FINRA (Financial Industry Regulatory Authority) helps protect the equity trader, and there are several exams created by FINRA that you are likely to be required to take, usually on the job. These are sponsored by the company you are working for, and include:
- Series 7 – Corporate securities, investment company securities, and variable annuities
- Series 63 – Industry regulations, protecting client interests
- Series 57 – Knowledge and abilities needed to trade securities
You can get some extra experience and knowledge to make you more attractive to recruiters, either through pursuing internships or work placements in equity trading firms.
You can join the Security Traders Association, which is a network of people in the industry, and a great place to get known and speak to traders.
What Is It Like Working as an Equity Trader?
Equity trading involves dealing with unpredictable and constantly changing financial markets, so there is no typical day for an equity trader, and they must be prepared to respond quickly to rapidly evolving events and scenarios.
An equity trader would usually get into the office early, at around 6 or 6:30 a.m., and spend the first few hours of the day getting themselves up to date with the latest market news and how this may impact the stocks they are trading.
They will also catch up with colleagues to exchange news and information before the market opens at 9:30 a.m. Eastern time.
Once the market opens, an equity trader will spend much of the day on the phone, updating clients and making trades.
A trader will be working multiple orders at once for several different clients, so they can’t afford to miss anything and will constantly be monitoring news and events.
The US stock market doesn’t pause for lunch so neither can the trader – sometimes there isn’t even time to go to the bathroom.
Throughout the day they will also be in an ongoing dialogue with other traders, sharing information that may affect their trades.
The market closes at 4:30 p.m. but equity traders may need to work later in the office and will regularly spend the evening entertaining clients at a restaurant, bar or sports game.
So, working as an equity trader can be exhausting, as well as exhilarating.
Salary and Career Progression
Career progression in the equity trading business is quite linear, and attaining the next promotion usually relies on high performance.
This position is mainly observing and learning, following and shadowing an analyst to learn about the business, how trades are made and learn all you can.
Interns are also responsible for helping the analyst run errands and help them be productive throughout the working day.
Interns do not usually have any contact with clients.
The first paid level in the building, the analyst starts to have responsibility for trading and for clients. They will still provide a support role for more senior traders, however.
As traders progress and perform well, they will be given higher risk limits so they can make more aggressive trades.
The average salary for an analyst starts at $75,000, up to $100,000, and with commission can earn up to $150,000.
At these levels, the role is mostly the same – making trades on behalf of clients. The main difference is the level of trust and the risk limits that are available. Associates and above are often supported by interns.
Moving from analyst to associate is a straightforward progression, but once at associate, you will stay there if your performance does not improve enough.
There is an option for equity traders to move off the floor and into the managerial side, which is less volatile, but often comes with less available bonus.
The average salary for an associate is between $100,000 and $125,000, with commission up to $200,000.
The average salary for a vice president is between $150,000 and $200,000, with commission up to $500,000.
The average salary for a director is between $180,000 and $250,000, with commission up to $1,000,000.
It is worth noting that in larger banks and equity trading businesses, higher level positions tend to come with less cash bonuses, as they are often put into deferred compensation pots or replaced with stock.
Leaving equity trading is not something that often happens – most people retire from working completely.
However, some people do move into hedge fund trading, asset management or proprietary trading because the skills needed are similar.
Others might focus on risk management or move into regulatory bodies like Financial Industry Regulatory Authority (FINRA).
There are more opportunities available for those who work with derivatives and have a strong knowledge of fundamental analysis, as this can be more widely applied in other financial positions.
Equity trading is a fast-paced role that is perfect for you if you have a mathematical mind, a keen interest in the economy and like making money for people.
Analysis, both technical and fundamental, are essential skills – so is the ability to make crucial decisions quickly. The focus on the micro rather than the macro in equity trading means an attention to detail will come into focus.
With the development of technology and growing automation, roles for programmers and app developers on the trading floor are becoming increasingly prevalent.
Hard-working, ambitious and dedicated equity traders will get great salaries, earn big bonuses and have a career where progression is based on performance.