In essence, equities are the same as stocks, which are shares in a company. In fact, equities and stocks are often used by traders interchangeably to describe the same thing. If you buy stocks, you’re buying equity in a company, but there is a slight difference between the two. Equity is your percentage ownership of the company while stocks are the individual units the company is broken into. If you own 50 stocks in Company A and that company has a total of 1000 stocks, you own 5% equity in the company.
Stocks are the most recognizable form of trading. They have been accessible to private traders for far longer than any other trading instruments. The way they were traded in the past, however, is vastly different to the way day and swing traders are using them today.
The Basics of Equities
When a company offers equities, it’s selling partial ownership in the company. This partial ownership is sold in units known as stocks. The other way to invest in a company is through bonds. When a company issues bonds, it’s taking loans from buyers which it will need to pay back with interest. Bonds will be discussed further in Cut Loose…! Episode 16
Equities are the most specific products available for active traders. Stocks in companies such as Apple or Microsoft can be very stable, very large investment options. They tend to move in more predictable patterns and are more popular with technical day traders. Fundamental day traders are more likely to be looking for low value shares that can change significantly on the back of news events. Swing traders will often look at mid to high market cap stocks to speculate on through various market conditions. Swing trading is discussed more in Season 3, Cut Loose…! Episode 4.
Long term investing in a company ties the investor to the company’s success. While this article is not specifically geared towards investors there are some important points to note.
Investing in equities is a young person’s game, particularly when it comes to retirement planning. Stocks can value and devalue over time as companies expand and diversify. Younger investors can ride this rocky road to success with less risk than someone who may need to liquidate their shares to live off in a few years. For the investor nearer retirement, bonds provide a similar investment in a company with more stable value and returns.
Trading in Equities
So if you are reading about equities in this series you are probably less likely to be thinking about a stock portfolio in retirement and more likely to be looking for short term gains.
Trading in equities is not necessarily owning shares, and so, to be very technical, it’s not really about equity at all. Equity, by definition, would require the trader to have some personal investment in a firm. Short term trading of stocks, however, is much more likely involve Contracts for Difference (CFDs). CFDs are explained in What is…? Episode 8 but, in brief, they involve wagering on price changes rather than actual ownership.
Technical traders look at price patterns over time and use these patterns to predict the future value of a company. Fundamental traders may look at similar seasonal patterns, but will focus more heavily on emerging market conditions and news events.
So Why Trade in Equities?
Equities trading has the potential to provide fast returns as well as long term investment options. Equities are the backbone of the trading industry and have existed for the longest period of time. They are a very diverse products ranging from technology to primary producers, fossil fuels to emerging renewables, and start-ups to institutions. For an equities trader the ability to specialize is greater than any other instrument and highly specific news and information is often very easy to find.
For day traders it is important to note that stock CFDs are generally leveraged to allow for short term gains. On the back of significant news, equities can move very quickly and have the potential to wipe out a trader’s share capital. It has been said before, and will be said again, only use leverage in combination with a solid risk management strategy.
Series 1 – What is…?
Episode 5 – Equities
Next – Derivatives