Equity, put simply, means ownership in a company. This is an asset class that’s popular with institutional investors such as pension funds or insurance companies or occasionally high net worth individuals.
Also known as the stock market, the equity market is, naturally, where equity/stocks are traded. Stocks (ownership) in companies are advertised, and traders working these markets will make the trades on behalf of their clients or for the bank or firm they represent.
The largest ‘publically traded’ (stocks on offer to the general public) companies sell their stocks through a stock exchange, such as the London Stock Exchange or New York Exchange, which you’re bound to have heard of. Smaller companies sell on the over-the-counter (OTC) market, which means the trade is made directly between two parties; not through an exchange.
The equity market is also divided up into a primary and secondary market: the primary market is for Initial Public Offerings (IPOs), companies offering new stocks for the very first time, whereas the secondary market deals with existing stocks and shares.
Some equity deals will grant stakeholder status to the investor, which means that they can receive a portion of the company’s profits (known as dividends). In the long term, equities can be very profitable for investors and, though they do carry a lot of risk as company stock values can be affected by a wide range of economic, social, political, or even environmental factors.
Research and portfolio management
Equity-based roles are mostly with asset management/investment firms or investment banks.
You could work as an equity research analyst in this field. The core aim of this role is to check out what’s looking like a potential good investment on the market. Equity research analysts may focus on a particular sector or equities based in a specific geographical area, like the UK, the USA, or the emerging markets (areas currently experiencing huge growth and industrialisation such as India and China).
They carry out research into hundreds of companies and organisations worldwide to see who could be worth an investment on behalf of their clients. They keep up to date on specific markets and overall market trends, such as supply and demand.
Equity research analyst and associates will also occasionally attend industry trade shows and events with a view to network and discover more about potential opportunities.
In terms of making the investments in equities happen, asset management companies have a division that takes care of portfolio management. Portfolio managers will meet with clients (institutional investor representatives or high net worth individuals) to discuss their aims and find out what they want to achieve with their assets.
They will then coordinate portfolio construction. They’ll meet with the research analysts and determine which investments look like the best options based on their findings. Then comes ‘stock selection’. The portfolio manager selects which assets to invest in (in terms of equities which stocks to buy…) and notifies the sales professionals at investment banks or stockbrokers at broker firms instructing them on what they’d like to buy, and at what price. This is called placing an order.
A decision to buy when a stock is decreasing in value is called ‘going short’, with the hope that prices will rise again in the future and there will be the option to sell on at a profit. If they choose to buy when it’s increasing in value it’s called ‘going long’.
Portfolio managers will usually invest in equities alongside other asset classes such as bonds or commodities. This is called diversification, as is a risk management technique which aims to offset higher risk assets with lower risk assets to minimise losses.
Analysts and associates in an asset management firm’s equities team or the asset management team at an investment bank also get involved with promoting asset management services to potential new clients. They’ll make presentations and undertake face-to-face meetings with them. Portfolio managers will keep existing clients up to date with their portfolio progress.
Fancy an equities job?
Equities can certainly be one of the more glamorous areas of finance to be involved with; an image helped along by the big names of FTSE 100 companies and programmes like Dragons’ Den – venture capitalism and equity investment can be exciting, influential stuff!
And surprise, surprise, it’s an incredibly competitive field to break into. If you’ve got your heart set on equities, then it’s best to start out by applying for internships with asset management firms and investment banks. There aren’t tons of opportunities available, so you’ll have to make sure your applications are tailored and demonstrate your enthusiasm for financial markets.
It’s generally a graduate area of recruitment, so you’ll need to have at least a 2:1 degree. A finance related subject will be an advantage.