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What is Trading Equity?
Equity trading occurs when a company incurs new debt (such as bonds, loans, or preferred stock) to acquire assets that can earn a higher return than the interest cost of the debt. If a company makes a profit through this financing technique, its shareholders receive a higher return on their investment. In this case, the trading has been successful. If the company earns less on the assets acquired than the cost of the debt, its shareholders receive a reduced return. Many companies use trading instead of raising more equity capital, in an effort to increase their earnings per share.Types of Equity Trading and Their Explanations
Based on the size of debt financing relative to available equity, it is classified into two types:- Trading in Thin Equity: If the equity capital of a company is less than the debt capital, it is known as trading with thin equity. In other words, the portion of debt (such as bank loans, debentures, bonds, etc.) is higher than equity in the overall capital structure. Trading with thin equity is also known as trading small or low equity.
- Trading on Thick Equity: If the equity capital of the company is more than the debt capital, then it is known as Trading Equity thick. In other words, the equity portion is higher than the debt in the overall capital structure. Trading with thick equity is also known as trading with high equity.
How to Trade Equity?
Here are some ways to do equity trading. These ways are:Day Trading
Day Trading is a short-term strategy that involves analyzing price movements. It requires traders to be alert and quick with their transactions. Day Trading strategies aim to buy and sell equities, such as stocks, and profit from small price movements when the market is very volatile. They then close their positions before the end of the day, in the hope that these small profits have offset any losses. Day Trading is effective in volatile markets, as there is more liquidity and traders enter and exit the market frequently.Use Option
Options are derivative contracts that can also be used to trade stocks and shares in the future, at a specific price. Orders for Options are executed in the same way as equities, with buy and sell offers, and transactions between the two products work in the same way. However, all Options have an expiration date, while stocks can be held indefinitely. In addition, Options do not entitle traders to dividends or ownership of the asset, while equity trading allows both.Social Trading Equity
You can also use information and strategies from other traders that you observe online. This is called social trading. For beginners, in particular, social trading equities is an effective method of mirroring the trades you see on our platform by other professional investors. Since the stock market can be volatile, social trading is a great way to familiarize yourself with our platform and any strategies you may use for stock trading.Advantages and Disadvantages of Equity Trading
There are advantages and disadvantages to Trading Equity. The outcome of any situation depends on how we behave. Let’s look at the advantages first.|
Advantages of Equity Trading |
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There are some disadvantages in equity trading as well.
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Cons of Equity Trading |
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What is the Purpose of Equity Trading?
The primary objective of companies that use the concept of equity trading to secure funds is to create wealth for the company’s shareholders. It does this by investing the funds secured through debt issuance in new avenues, new assets, and new manufacturing processes. This is done by the company in the hope of earning a higher return than the cost incurred by it to issue debt capital. While this is the primary objective of equity trading, there are other objectives of this strategy as well. Here is a brief look at some of them.- To ensure that maximum funding comes from debt rather than equity sources.
- To ensure that control over the company remains the same. Gaining access to funding through equity tends to dilute ownership of the company.
- To increase the market price of the company by choosing to use debt rather than equity sources for funding.
Equity Trading Example
If you have open positions, your Equity is the sum of your account balance and your account floating P/L. Equity = Account Balance + Floating Profit (or Loss)Example: Account Equity When Existing Trades Are Losing
You deposit $1,000 into your trading account. Beyoncé tweets that she is shorting GBP/USD. Because she is Beyoncé, you follow what she says and are wrong. The price immediately moves against you and your trade shows a floating loss of $50. Equity = Account Balance + Floating Gain (or Loss) $950 = $1,000 + (-$50) The equity in your account is now $950.
Example: Account Equity When Existing Trade Wins
Beyonce tweets again and says she has changed her mind. She is now long GBP/USD. The price immediately moves in your favor and your trade shows a floating profit of $100. Equity = Account Balance + Floating Gain (or Loss) $1,100 = $1,000 + $100 The equity in your account is now $1,100. Your account equity continues to fluctuate with the current market price as long as you have an open position. Equity can be calculated by subtracting liabilities from assets and can be applied to a single asset, such as a real estate property, or a business. For example, if someone owns a house worth $400,000 and owes $300,000 on a mortgage, the difference of $100,000 is equity. To calculate the shareholders’ equity of a business, a variation of the balance sheet formula can be used: Shareholders’ Equity = Assets - Liabilities For example, if a company’s total assets are $1,000,000 and its total liabilities are $300,000, the shareholders’ equity would be $700,000. After learning about equity trading, along with its types, how to do it, advantages, objectives, and examples, then you can be sure that you understand more about equity trading. The next step is to register yourself to trade at GIC and follow GIC Instagram for more info!
