Equity Trader

Trading equity shares for a living

An equity trader also called a stock trader or a share trader, is a financial professional who buys and sells shares of publicly listed companies to earn a profit. 

Equity Trader

Similar to bond traders, stock traders trade shares on the secondary market. 

The secondary market is where the buying and selling of securities occur between market participants after the stock has been first listed (the market where it is first listed is called the primary market). 

An equity trader invests in the equity capital markets to buy company stocks instead of bonds. The idea of trading is to buy when prices are low and sell when prices are high, thereby bagging the difference as profits.

What Is an Equity Trader?

In the equity markets, a trader can be an individual or a firm that buys and sells shares of a listed company. Individual retail traders are in charge of their capital and accounts. 

The term" equity traders" can also refer to the "sales and trading (S&T)" desk at investment banks that facilitate and manage trades between buyers and sellers of company shares. In this instance, institutional or professional traders buy and sell equity securities on behalf of a group or an institution. Institutional traders use the firm's capital, not their accounts, to execute trades. This is called flow trading and is a significant source of revenue for investment banks.

The main difference between the equity and the debt markets is that in the equity market, traders and investors exchange money for ownership in a company. Hence, the factors affecting their returns are stock market momentum, company profitability, etc. 

Debt market traders and investors, on the other hand, lend money to a company in exchange for repayment of the debt, which is usually done through bonds. The factors affecting their returns include credit rating, interest rates, etc.

What Is an Equity Trader?

Equity Market Overview

The equity market is a market in which the stocks of publicly traded companies are exchanged between buyers and sellers. It is one of the largest and most important types of financial markets globally.

Companies that wish to raise equity capital from the capital market will have to go through the process of initial public offering (IPO) or direct listing, the latter of which is also known as direct placement or direct public offering (DPO). 

Stock exchanges, such as the NYSE or the NASDAQ, and the stock market, as a whole, provide companies with an opportunity to grow their businesses by obtaining investments from the public. As a result, the investors, or shareholders, have a stake in that company's growth and success. 

Equity Market Overview

Equity markets can be divided into different categories depending on their geographic location - domestic or international. The growth equity market, which refers to companies not listed on stock exchanges, is a particular example of the private equity capital market that has gained momentum over the past decade.

Companies can raise much more money in the equity markets than through borrowing from banks or other financial institutions. Equity also carries much fewer restrictions than debt, which carries a lot of covenants. Another critical point to note is that equity does not have to be repaid, unlike debt which brings down the financing burdens of the company.

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Who Trades in the Equity Markets?

There are many types of people who participate in the equity markets. 

The most common type of the participant is an investor, who invests their money into the markets to make a long-term profit. These investors can be oriented towards growth or value investing depending on their investing preference and principles. Traders looking to bag short-term profits make up the second most common participants. 

Short-term trading, such as day trading, usually involves opening and closing positions to buy and sell equity securities within a day. Even though short-term trading is considered very risky, it could sometimes be less risky than long-term investing if adequate and appropriate risk management strategies are in place. Of course, it goes without saying that a short-term trader must also know how to minimize loss and maximize returns.  

Who Trades in the Equity Markets?

The other types of equity market participants are speculators and arbitrageurs. The former tries to predict changes in the market, while the latter essentially takes advantage of price discrepancies. Speculators are seasoned traders who make investment decisions based on convictions about the short-term price fluctuations of a stock. 

They are more concerned about technical analysis, which relates to the price action and pattern of the security, than the fundamentals of a stock, such as company management, products, services, and growth potential. 

There are different types of speculators, which are metaphorically associated with different animals and are outlined below: 

  • Bulls - Bullish speculators believe that the security price will increase in the future. They buy the asset or take a long position in it, hoping to sell it in the future at a profit. 
  • Bears - Speculators who think that a stock will experience downward pressure in the future will sell it and buy it at a later stage to make a profit from the price difference. Bears borrow the stock from their broker and are said to take a short position.
  • Stags - A very informal definition of a day trader, this market participant has a much shorter timeframe to execute their trades compared to bullish or bearish traders. A stag can be more involved in primary markets where private companies prepare to go public. They aim to sell their shares at a premium after allotment. 

Share allotment means issuing new shares by a company to new or existing shareholders. Arbitrageurs, derived from the French word arbitrer, meaning evaluate, are finance professionals who profit from the price discrepancies of an asset. 

An arbitrageur benefits from the discrepancies in the price of a stock - for instance, buying a company stock A on the NYSE for $30 and reselling the same stock at the Frankfurt Stock Exchange for $35. In addition, they exploit market inefficiencies to attempt to lock in their profits. Typically, arbitrageurs are institutional traders such as hedge funds or banks. 

As price discrepancies are generally very small, a large amount of capital is required to profit from them, thus making institutional investors the right market participants to be involved in arbitrage

The activities of speculators, traders, short-sellers, and arbitrageurs are usually beneficial for improving the efficiency and liquidity of markets. Some of the functions they contribute to are price stabilization, liquidity, and rebalancing of the supply and demand curve.

Different types of speculators: Bulls, Bears and Stags

Why Become an Equity Trader?

If you get it right, becoming a trader can be a very rewarding and lucrative career. When you become an equity trader, you'll be able to make money from rising and falling share prices, depending on your strategy.

For example, if a company's stock price goes up after investing in it, you'll experience gain. Conversely, if the company's stock price falls after buying it, you'll register a loss. A crucial factor in trading is having a thorough risk management strategy so that you don't lose your capital all at once.

It is also important not to let your emotions play into your decisions. Hoping that the trade will go your way after it has not might mean the difference between fighting another day or losing all your capital.

Often seen as a high barrier-to-entry position, a career trader has various benefits, some of which are illustrated below: 

  • Control over your income potential - The upside potential for skilled and profitable traders is quite significant. Equity trading is right for you if you want to have substantial control over your income potential. However, to become an expert money-making trader, you must be patient, committed, persistent, and ambitious.
  • Exposure to both domestic and international equity markets - You can also trade securities on other exchanges or even in other countries.
  • Build your trading plan and execute it - This is more important if you're an individual trader and manage your own money.
  • Establish a risk management strategy - Having a risk management strategy that is also in line with the risk parameters of your employer is of paramount importance.
  • Usually better work-life balance - Since they are active when the markets are active, traders typically have a better work-life balance.

Why Become an Equity Trader?

How to Become an Equity Trader?

There are two parts to consider if you want to become an equity trader:

  1. The first is the educational requirements you need to fulfill, discussed below. 
  2. The second element is about personal characteristics. You need to evaluate your personality traits as this can help you understand what kind of equity trader you want to be.

Having the ability to stick to rules and being persistent, patient, and adamant are some of the crucial factors in becoming a successful trader.

The Education Requirements of an Equity Trader

If you aspire to become an equity trader, you need to have a Bachelor's degree, usually in finance, accounting, economics, or business administration. Some employers may require higher graduate degrees or specialized certifications. Some traders have MBAs which can unlock more job opportunities due to the increased networking opportunities.

Aside from academic education, an aspiring trader looking to work at an institution and not using their own capital must pass the relevant exams and obtain the qualifications required to practice the profession legally. 

They first need to pass the Securities Industry Essentials (SIE) exam in the US. After successfully completing the SIE exam, they must pass the Series 57 exam. The Series 57 exam is designed specifically for securities traders. 

The candidate must also meet the eligibility criteria, i.e., they must be associated with and sponsored by a FINRA member firm or other applicable self-regulatory organization (SRO) member firm.

Upon completion, the candidate obtains his/her Securities Trader registration with the Financial Industry Regulatory Authority (FINRA) and can work as:

  • NASDAQ equity trader
  • Over-the-counter (OTC) equity trader
  • Proprietary trader

Finally, you need to have excellent interview preparation, and if you're considering being a proprietary trader, our prop trading interview course will help you stand out. 

How to Become an Equity Trader?

Types of Equity Traders

Share traders can be categorized into different segments depending on their approach: 

  • Fundamental traders

As the name suggests, Fundamental traders use fundamental analysis to make trading decisions. Fundamental analysis is based on the idea that a company's economic, financial, and operational condition will determine its value. 

A stock trader who uses fundamental analysis for their strategy may look at a company's previous three years to analyze its revenue and profit margins. They may also look at the number of shares outstanding to understand the company's capitalization and growth potential.

Additionally, the trader may also consider how the management communicates with shareholders, whether there are any pending lawsuits or major changes in legislation that could affect the company, or if there has been a significant innovation such as a new product or service that could substantially change the business.

Fundamental traders generally have a more extended timeframe for their trades. They tend to have similarities with buy-and-hold investors.

  • Technical traders

Technical traders execute their trading plans based on technical analysis. The objective of technical analysis is to identify trends in market data using graphs and charts. 

They use patterns in the price action of a stock along with different indicators, such as stochastics, Fibonacci retracement, Bollinger bands, and others, to estimate where the stock price is going next and make a decision based on this. 

Technical analysis involves the use of graphs and charts. The most common and used graph is the candlestick.

Candlestick charts are vertical bars that represent the opening price (the top), the closing price (the bottom), and the high and low prices during a trading period. 

Candlesticks with short vertical bars indicate lower volatility, while candlesticks with long vertical bars indicate longer-term price trends.

  • Swing traders

Swing traders execute positions in a short-to-mid-term timeframe. Unlike day traders who can open and close multiple trades in a single day, swing traders tend to hold their positions for more than a day or a few days, sometimes even a few months, to take advantage of larger market moves. 

Swing traders use both technical and fundamental analysis. However, the major difference that distinguishes them from the day traders is the holding period of securities. Generally, swing traders buy and sell large-cap stocks.

Types of Equity Traders

What Skills Do You Need To Be an Equity Trader?

Traders and, in particular, share traders need to possess a specific set of skills that will help them succeed in the role. Besides the educational requirements and mastering fundamental and/or technical analysis, stock traders also have to demonstrate:

  • Analytical skills - They need to analyze data quickly and efficiently to make profitable trading decisions. Chart and graph analysis is a vital part of these skills.
  • Research skills - When combined with a consistent market study, research skills can give an edge in their highly stressful and competitive job. They have to be quick in digesting all the information and evaluating how it can impact their decisions and their trade assets.
  • Emotional control - A stock trader must be able to handle their emotions well, particularly when a trade or a series of trades goes against them. It has been proved that people focus more on losses than on wins of the same magnitude.
    • Hence, this is a crucial behavioral aspect to control for traders. Having an established and tried-and-tested trading plan and strategy enables traders to stay on top of what they do. If they give in to their emotions, the strategy is rendered useless. Controlling emotions is one of the key differences between professional and amateur traders, the latter being driven by the YOLO and FOMO mentality.
  • Recordkeeping - A successful trader records all executed trades with their buy and/or sell stop, stop losses, and the process and rationale behind buying or selling securities. The trading journal allows them to learn from their mistakes and helps them refine or adapt their strategy to market conditions. Being able to adapt is critical. If some aspects of the trading strategy are no longer relevant, the trader has to review and replace them to stay competitive and profitable.
  • Ability to design and execute trading strategies - A trader must be able to advise on, establish and run trading plans that fit into the firm's investment strategy and risk appetite.

What Skills Do You Need To Be an Equity Trader?

Risks Related to Trading Equity

The finance industry is subject to different risks, and equity trading is not an exception. Some of the major risks that stock traders face are: 

  • Business risk (insolvency or bankruptcy risk): The risk in trading equities is that the company can go bankrupt, and the shares will have no value. In the event of a Chapter 11 bankruptcy filing, the company could turn around, and equity investors are likely to retain some ownership in the reorganized business. Triggering Chapter 7, on the other hand, makes shares worthless as there is no possibility for a turnaround.
  • Price risk: Share prices rise and fall and can be influenced by regulatory and political announcements, interest rates, and risks associated with the market or the specific company. For example, technology companies' share prices tend to drop when interest rates rise because the nature of their business and operating model is more sensitive to an interest rate hike than other sectors. A skilled trader must identify, interpret, and factor in those risks in their trading activity. 
  • Market sentiment: The market sentiment is a psychological risk as it reflects the predominant attitude towards a specific stock, an industry, or an entire asset class. Therefore, an equity trader must be aware of whether the market sentiment is positive, negative, or neutral and how this is likely to impact the prices of the stocks they trade. 

Trading Activity Risks

Traders also face risks due to the fact that there are many different ways to make a trade, and they all have their specific risks:

  • Cash transaction trading - The trader must have the upfront capital if they're buying stocks. If the account size is significant, the challenge with cash transacting is that the trader has to provide all the funding. However, this is less risky than trading on margin as there is a floor to how much one can lose (the cash amount invested).
  • Margin Trading - Margin trading simply means that the trader borrows money from their broker to buy shares. The shares, in this case, will serve as collateral. Margin trading enables the trader to have a lower initial capital compared to the cash transaction method. Buying on margin can magnify both profits and losses. The risks associated with trading on margin are liquidation and margin call requirement.

Risks Related to Trading Equity

How Much Do Equity Traders Earn?

The average salary for an equities trader is in the 80k range. However, it can quickly reach a six or seven-figure number, which depends on the experience, the location, and the education. Major hubs in the U.S. offer share traders on average $90k-$100k a year. 

San Francisco tops the leaderboard by offering $118k annually. 

Having a flawless trade execution, generating alpha while protecting the employer's balance sheet are all qualities that can influence the pay packet. 

Proprietary traders, who trade with their firm's capital and not clients', are usually paid more than flow traders or market makers. 

The bonus element in the trader's compensation depends mainly on their performance. The years of experience could also be considered when bonuses are given. Generally, banks pay a 6% bonus based on the trader's book minus their salary, or the seat cost as it is also known. If you reach a multi-million profit, the bonus could be easily a six-figure number. Higher bonuses, within the 10-20% range, are more common for hedge fund traders.

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Additional Resources

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