Understanding Effective Trading Strategy Starts Here
Equity trading may sound serious and complicated, but chances are you already have an inkling as to what it entails.
The terms ‘equity market’ and ‘stock market’ are actually interchangeable, so equity trading refers to trading equities or stocks.
Regardless of which term you like better, it’s important to understand the basics of this type of trading before you can become an effective trader.
Over the next few days, I’ll detail all things equity market so that you can gain a better understanding of the platform on which your trades are conducted.
After reading them, you can be better informed and better positioned to take advantage of the opportunities the equity market has to offer.
Basics of the Equity Market
Let’s start at the beginning: What is the equity market?
An equity market is a place where companies can raise necessary capital from investors. The market is like the rendezvous point where buyers and sellers come together.
Shares of the company’s stock are issued, which are traded by investors. The investors have the opportunity to profit by investing in shares of the company.
The shares can be traded through exchanges or what is called “over the counter” markets. Here’s a brief description of each:
This is a marketplace where stocks/securities, commodities and derivatives are traded.
The reason the exchange exists is to make sure that trades are conducted in an ethical and fair way, and so that the market can operate efficiently. Basically, it’s the platform that acts as the vehicle for trading, and offers certain protections to traders by mandating standards for the companies listed.
This is a different type of market for trading. In an over-the-counter (OTC) market, the dealers are also the market makers, quoting the prices at which they’ll buy and sell different securities.
In the OTC market, things aren’t quite as stringent as in the exchanges. There can be more privacy for buyers, and for companies listed, as well. They don’t have to meet the same stringent standards and regulations for listing.
This can be good in that it gives companies an opportunity to be listed. But it can also be bad because this system can tend to invite more fraud. Many penny stocks are listed on OTC exchanges.
Equity Vs Commodity Markets
OK, so an equity market is the stock market. But what about this other term you’re hearing tossed around: the commodity market?
The commodity market is like the stock market, in that it’s a marketplace where investors can buy or sell, but what’s being sold is different.
In the equity market, investors are trading shares of stock in companies.
In the commodity market, investors are trading in raw materials, or items that might be used to produce other goods. So, for instance, commodities might include gold, silver, precious metals, and so on.
It’s possible to buy the same commodity from a number of sources and then to sell to a variety of buyers.
There are a few other key differences between the equities market and the commodities market, which are:
1. The Duration of the Listing
Stocks can stay on exchanges for a very long time — for instance, what is today the Consolidated Edison Company of New York (ConEd) was originally listed under its original name, New York Gas Light, on the New York Stock Exchange in 1824.
Commodities, on the other hand, are traded via futures contracts. A futures contract is where investors will buy or sell based on a desired future price of the commodities, and will make a contract committing to buy if the price reaches that point.
That means that it’s a bit more finite.
2. Analysis and Research
The way that a trader might approach a trade will be a little bit different with an equity versus a commodity.
In the stock market, you’ll rely on a combination of fundamental analysis, and technical analysis to figure out a stock’s story.
Basically, with stocks, you use a combination of these research methods to identify a good company to invest in, with a stock that has solid, predictable performance.
In the commodity market, these raw materials are less subject to company news and earnings reports, and more due to the supply and demand based on industry.
Commodities tend to have seasons and trends, so analyst recommendations are frequently a part of the research for this type of investing.
In both cases, the equity market and the commodity market have benefits to offer investors.
In the stock market, you earn profits or dividends.
With commodities, you gain profits when the goods in question gain value.
Some investors also consider commodities a good investment during times of economic uncertainty, as they are physical possessions which will still be in demand.
Importance of the Equity Market
How big is the equity market, and what is its impact on the economy?
The stock market is hugely important to a country’s economy. To consider the impact it has, consider the primary function of the equity market: building businesses.
When a company wants to raise money to expand or create new business, they can take out a loan from the bank or they can issue shares through the stock market.
The stock market makes a piece of the company available for sale to the public, so that you and I can purchase a stake in it.
To do this, they need to be listed. On bigger exchanges, companies must meet stringent standards to be listed.
As an investor, you can benefit from the company’s growth, receiving dividends or seeing the price of the stock appreciate over time.
In this way, the stock market helps build companies, which helps build industry and commerce. This has a big effect on the economy, contributing to the employment and unemployment rates, production, and so much more.
The government and central banks will generally keep a close eye on what’s going on in the stock market, as it affects them too.
OK, so that’s the primary function of the equity market … but it’s not the only function.
The equity market also acts as a platform for the stock exchange. This is where investors can buy and sell stocks. These transactions are executed through a brokerage account, which acts as your buying or selling agent in the market.
This is how I use the equity market to try to gain profits: through investing in shares of stocks that I believe will go up or down in value, and either selling or short selling depending on which way I think the stock will go.
So, as you can see, the equity market isn’t just a place for companies to foster new growth, but it’s also a place for stock trading. The stock market renders stocks into liquid assets, which can be sold or bought at any time.
The Bottom Line
Keeping the various exchanges and types of markets straight can be a bit confusing at times. But I’m confident you can do it.
It’s important to have a good grasp on the market or exchange you are trading on so you know the inherent risks, and potential benefits. Knowing the ins and outs of the different markets will bring your trading to the next level.
Tomorrow, I’ll cover some of the best ways for you to analyze equities and structure your trading plan.
Editor, Penny Stock Millionaires