The Equity Trader.
Who is an Equity Trader?
An equity trader performs research and analysis to decide when to buy or sell shares of a company on an equities market. In addition to common stocks, equity trader can include trading options, futures, exchange-traded funds, and other derivatives. Equity traders analyze data, look at charts, and ensure profitable trades.
Fundamental Analysis:
Fundamental analysis is a method of evaluating the intrinsic value of an asset and analyzing the factors that could influence its price in the future. This form of analysis is based on external events and influences, as well as financial statements and industry trends.
Before bouncing straight into buying company shares, you have to assess the financial position of the company and decide if it is an advantageous venture. The fundamental analysis comprises breaking down financial statements such as a balance sheet, income statement, cash flow statement, or even a statement of retained earnings.
An equity trader looks at financial metrics such as profit margin, quick ratio, and receivables. Anything that can give an equity trader insight into whether or not a company is performing well is looked into and analyzed thoroughly prior to making an investment decision.
Technical Analysis:
The second type of analysis that an equity trader uses is technical analysis. This type of analysis involves examining and predicting price movements in the financial markets, by using historical price charts and market statistics. It is based on the idea that if a trader can identify previous market patterns, they can form a fairly accurate prediction of future price trajectories. A variety of technical analysis tools are used to help an investor in predicting what a stock might do given historic data and activities.
Difference Between Equity and Debt Securities:
Many individuals are familiar with equity securities but not the same number of know debt securities. People who do not know the distinction between the two securities might seldom classify debt securities as equity security unknowingly, and this is where complexity can occur.
Debt Securities:
Debt security refers to a debt instrument such as a government bond, corporate bond, certificate of deposit (CD), municipal bond, or preferred stock that can be bought or sold between two parties and has basic terms defined, such as notional amount (the amount borrowed), interest rate, and maturity and renewal date.
Debt securities also include collateralized securities, such as collateralized debt obligations (CDOs), collateralized mortgage obligations (CMOS), mortgage-backed securities issued by the Government National Mortgage Association (GNMA), and zero-coupon securities.
Unlike equity investments, in which the return earned by the investor is dependent on the market performance of the equity issuer, debt instruments guarantee that the investor will receive repayment of their initial principal plus a predetermined stream of interest payments. Of course, this contractual guarantee does not mean that debt securities are without risk, since the issuer of the debt security could declare bankruptcy or default on their agreements.
Equity Securities
The most well-known type of equity securities is common stocks of publicly-traded companies. These are issued by companies to shareholders and confer an ownership (equity) interest in the company. Many stocks pay quarterly dividends to shareholders, although neither specific dividend amounts nor any dividend at all is guaranteed.
Equity securities offer potentially higher returns on investment (ROI) than debt securities, but the potentially higher return is accompanied by inherently greater risk. The equity market is also much more volatile than the debt securities market.
The added risk associated with equity trading is why an equity trader does constant research and market analysis in order to make the best possible investment decisions.
Risks for an equity trader
There are multiple types of risks that are involved in equity trading. There is a systematic risk – the risk that is inherent in the equity markets and therefore common to all stocks, and unsystematic risk – the risk that is specific to an individual stock or company. Three broad categories of risks that affect the equity markets are political, interest rate, and regulatory risk.
Regulatory Risk
The regulatory risk stems from the in-depth relationship between government and businesses. Governments constantly pass laws and institute regulations that can significantly impact individual companies or the equity markets as a whole.
In the aftermath of the 2008 Financial Crisis, government regulation of investing and the financial services industry expanded substantially and has affected all of the financial markets. It’s estimated that merely the costs of compliance with the comprehensive Dodd-Frank Act of 2010 have decreased return on assets (ROA) for small, community banks by as much as 14 basis points.
Regulatory risk is, in short, the risk that one or more government regulations may negatively impact a company’s profitability.
Interest Rate Risk:
Interest rate risk alludes to the risk presented to organizations by the chance of rising interest rates. Since numerous organizations convey a large number of dollars paying off debtors, even a little change in interest rates can significantly affect an organization’s income and capacity to reimburse its remarkable obligation. Because of the way that all organizations depend somewhat on debt financing, interest rate risk is an almost general worry for organizations.
Notwithstanding the risk presented with respect to an organization’s capacity to deal with its own debt, increasing interest rates can contrarily influence organizations through the effect of interest rates on consumers. Consumers faced with coping with higher interest rates in relation to their personal debt may cut back on discretionary spending i.e., stop buying as many consumer goods. This can depressively affect the entire economy, introducing further threats for organizations as far as staying beneficial or even just monetarily dissolvable.
Political Risk:
Political risks are risks associated with changes that occur within a country’s policies, business laws, or investment regulations. Other influential factors include international relationships and any other situation which may have an influence on the economy of a given country.
A common example of political risk is countries that are in political upheaval. Many countries are experiencing changes in social attitudes and perspectives as of late, causing unrest, changes in politics, and political movements that are disrupting economies.
Relatively new to the scene of political risk is technology. The rise in cell phone ownership allows everyone with a phone to be a photographer, journalist, or source of information. Confidence in investments, companies, and countries can be shattered within a matter of seconds of a video being posted online.
It’s important to note that political risks aren’t always well-defined in many cases, the risks may be rumors with little or no substance behind them. International investors must, therefore, keep an eye on the news rather than just looking at just performance data to manage these risks.