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What is Equity Trading?

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  • Written By: Jim B.
  • Edited By: Melissa Wiley
  • Last Modified Date: 08 November 2016
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Equity trading refers to the practice of investors buying and selling shares of companies on a publicly traded exchange. By buying equity shares of stock in a company, an individual is essentially getting a small share in the ownership of that company. Shares may also be sold, and the goal of all equity trading is to buy shares when they are priced low and sell them when they are priced high. Prices are determined by how many shares of a particular company are available and how much demand there is for those shares.

Many people wish to invest in the stock market but don't particularly understand what exactly they're getting when they buy and sell stock. If someone has stock in a company, it is simply another way of saying that the person has equity in a company. The value of that equity can rise and fall along with the fortunes of that company. Equity trading is a way for investors to try and benefit from these rising and falling prices and make a profit.

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In general, equity trading takes place on a publicly traded exchange market such as the New York Stock Exchange in the United States or the London Stock Exchange in Great Britain. Trades may be available through so-called over-the-counter markets, which don't have a centralized exchange overseeing them. The main problem with these markets is that the liquidity of shares, which is the ability to find buyers and sellers for them, is lower than on the main exchanges. Publicly traded companies raise capital by issuing their equity to investors.

The two basic types of orders that an investor may issue in equity trading are buy orders and sell orders. A buy order means that the investor wishes to buy a certain amount of stock in a company, while a sell order means that the investor wishes to sell stock he already holds. These orders are executed when one investor offers a bid price, which is the price at which he wishes to buy one share of stock, and another offers an ask price, which is the price at which he is willing to sell one share.

Licensed stock brokers used to be primarily responsible for matching up bid and ask prices, although now the process is generally achieved electronically. If the stock price of a company rises due to increased demand for shares, the person holding shares will see their values increase. She can then continue equity trading and attempt to cash in on the price increase by selling the shares, or she can hold onto them in hopes that their price will continue to rise.

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