What is cash equity?
The term cash equity refers to the liquid portion of an investment that can easily be converted into cash. In relation to investing, cash equity refers to the company issuing stocks to the public. It may also refer to institutional trading of these shares. In relation to real estate, the amount of property’s value that is not borrowed against a mortgage or line of credit.
How does cash equity trading work?
In the capital market, cash equity trading refers to the trading of equities or stocks done by large financial institutions on major stock exchanges. For example, the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). These companies trade in shares using the firm’s capital. Also, they place trades on their behalf and trade on behalf of retail investors or institutional clients.
For example, ABC broking firm buys 20 lakh shares of Reliance Industries because the firm’s analysts believe that the stock price is increasing over the next week. This, ABC Broking firm invests its own capital and uses computerized trading to place the trade instantly. Hence, the company hopes to generate short term profit and the profit to the firm’s capital. Similarly, ABC Broking company can place trades for large institutional clients like mutual funds. Also, if an individual investor wants 100 shares of Reliance Industries, the ABC Broking company places the trades immediately using the same computerized system.
In both instances, the broking firm must place customer trades before placing the trades for the from accounts. Therefore, to ensure fair trading executions for clients, this policy has been put in place. Furthermore, if the brokerage firm wishes to buy Reliance Industries using the firm capital, and already has customer orders to purchase the same stock, the broker must place the client’s orders first.
Equity shares are one of the most common terms of equity capital markets. These shares are a primary source of funds for any organization. The trading of equity shares happens in the stock market. A stock market is a place where buyers and sellers meet to trade stocks. To trade in equity shares, one must have a demat account and a trading account compulsorily. In this account, the company issues shares which are in the electronic form in the demat account. Also, through this account, the investor can purchase and sell shares.
Equity indicates ownership in that company. One can purchase shares and retain them for longer durations as a long term investment tool. Also, shares can be traded for shorter durations to make quick profits.
Cash Equity trading by investment firms focuses on short term trading. They intend to generate quick and large profits from changing market prices. Therefore, the traders back their trade with firm capital rather than with the borrowed money.
Benefits of cash equity trading
The following are the benefits of cash equity trading –
- Investors receive equity shares in the digital form in return for the cash invested in the company.
- An investor or trader can hold equity shares for any duration.
- The risk involved in cash equity trading is comparatively lesser than in derivatives.
Investing in equity shares for a longer duration reduces the overall risk to the investor.
A large portion of the institutional cash trading is computerized trading programs. These firms use computers to buy and sell large volumes of stocks in a fraction of a second. When news reports are discussing electronic and computerized trading, these reports are referring to the cash equities trading market. Through computerized trading, a large volume of stock trading is happening on the big stock exchanges. Also, financial firms can generate profits from marginal fluctuations in the individual share prices.
Customer equity trading
Cash equity trading from financial firms also includes trading for its customers. These trades include large volume trades, special off-exchange trades and trading with customer funds. Equity trading is suitable for customers who have a substantial amount to invest. The firm handover over the customer’s money to traders who are professional stock market traders. These stock trading desks use cutting edge technology to deliver superior services to customers. Also, these advanced stock trading tools are available only in the trading firms. Generally, individual traders do not have access to this facility.
To summarize, large financial institutions perform cash equity trading on behalf of the customer. The purpose of cash equity trading is to make quick and large profits from stock price movements.
Today, stock exchanges also provide fully automated and computerized screen-based trading platforms. A buyer or seller can view their trades on this platform. They can place orders or view their trades that suit their requirement. Furthermore, the stock exchanges also clear and settle all the transactions executed during the day. The transactions are aggregated, and positions are squared off to determine the liability of the trading member.
Lastly, the stock exchanges constantly upgrade their risk management system to stay up to date with the changing mechanisms.
Frequently Asked Questions
The financial firms conduct trading activities in several types of securities market besides cash equity trading. Some of them are trading in bonds, exchange-traded funds, equities derivatives, futures and options etc. Trading in bonds includes government bonds, investment-grade corporate bonds and high yield bonds. Trading in futures includes trading of equities derivatives, bonds as well as commodities. Derivatives trading have different risk and rewards in comparison to cash equities trading.
An investor must know the difference between cash vs equity. Cash is considered to be guaranteed value in hand (setting aside the inflation factor). However, equity is the shares of the company where the investors are part owners of the company. The value of equity may increase or decrease due to stock market fluctuations. However, the cash remains constant in the hands of the investor. The value of money in hand might also deteriorate due to the inflation factor.
Cash trading means buying and selling of securities using the cash in hand rather than the borrowed capital or margin. In other words, cash trading allows an investor to buy stock with cash available in the account. This trading is more than one-day trading.
Intraday trading is one-day trading where an investor can buy and sell securities in a day. The broker provides an additional margin for trading.