How to Become an Effective Equity Trader

Equity sales and trading (S&T) is a challenging but exciting career that requires an in-depth knowledge of markets and what drives them, as well as a strong desire to sell/trade, the ability to think quickly, and the willingness to take risks while staying calm under pressure.

This is most definitely not a career for the squeamish or the risk-averse; those who are temperamentally suited to it will also have to demonstrate an innate understanding of the following areas:

  • Fundamentals of equity sales and trading
  • Equity valuation and analysis
  • Exchange traded funds (etfs)
  • Equity derivatives
  • Hybrid securities
  • Life of a trade
  • Risk principles
Equity sales and trading (S&T) is a challenging but exciting career that requires an in-depth knowledge of markets and what drives them, as well as a strong desire to sell/trade, the ability to think quickly, and the willingness to take risks while staying calm under pressure.

Fundamentals of Equity Sales and Trading

The basics of equity S&T include equity issuing and trading, equity indices, the differences between fundamental and technical trading, and basic hedging and trading strategies for equity markets. These all need to be second nature to the prospective equity trader.

Key learning areas here include:

  • Equity trading basics
  • Equity indices
  • Technical vs. fundamental trading
  • Equity trading strategies
  • Equity hedging
  • Dark trading

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Equity Valuation and Analysis

It is important to learn the processes, frameworks, techniques, and models that analysts use when assessing and valuing equity securities.

Key learning areas here include:
  • Equity valuation
  • Industry and company analysis
  • Equity returns analysis
  • Equity valuation – DCF models
  • Equity valuation – other methods

Exchange Traded Funds (ETFs)

Equity traders need to learn how to recognize the key features of ETFs that make them such a widely-traded and attractive investment option for many clients.

Key learning areas here include the basics of ETFs along with their different types, such as equity ETFs.

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Equity traders need to learn how to recognize the key features of ETFs that make them such a widely-traded and attractive investment option for many clients.

Equity Derivatives

Competent and sought-after equity traders understand the most popular equity derivative structures, including equity options, index futures and options, and equity swaps. There should not be anything on the list below with which the trader is not fully familiar.

  • Forwards and futures
  • Swaps
  • Options
  • Equity derivatives
  • Equity options and warrants
  • Equity index futures and options
  • Equity swaps

Hybrid Securities

An equity trader needs to be able to identify the purpose of debt/equity hybrid securities - including contingent convertibles - and how their development was influenced by regulatory capital requirements.

Key learning areas here include the basics of convertibles, their various complexities, and the mathematics associated with this particular section of hybrid securities. Also required would be an ability to value convertibles and a good understanding of contingent convertibles.

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An equity trader needs to be able to identify the purpose of debt/equity hybrid securities - including contingent convertibles - and how their development was influenced by regulatory capital requirements.

Life of a Trade

Part of an equity trader’s job is having a profound understanding of trading, which requires being familiar with the entire trade lifecycle, from pre-trade activities and trade execution through clearing and settlement and ongoing position and risk management.

Key learning areas here include:

  • Pre-trading
  • Trading execution
  • Trade clearing and settlement
  • Ongoing position and risk management
  • AI applications, specifically transaction cost analysis

Risk Principles

Any prospective equity trader must learn to identify the different risk types that can arise in a trading environment and the basics of assessing and measuring these risks.

Key learning areas here include:

  • Risk types and measurement
  • Risk modelling
  • Business strategy and risk decision-making
  • Tools and techniques
  • Risk reporting
  • Credit risk
  • Market risk
  • Counterparty credit risk
  • Liquidity risk
  • Operational risk
  • Climate risk

The technical complexities involved in the daily routine of an equity trader are often overlooked in favor of the personality profile typical of the role. But the bottom line is that while a cool eye and steady hand count for a lot, and a stomach for risk will see many a trader make a certain amount of progress in the field, it is the traders who arm themselves with skills and knowledge who ultimately prevail. By familiarizing yourself with the areas outlined above, you can look forward to a successful and rewarding career in this high-octane world.
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