Cash Equities

This marketWhat it is, what trades, and the ideas it runs on.

The market at a glance

Cash equities are the ownership layer of capitalism: the listed shares of companies all over the world, traded on exchanges from New York (NYSE, Nasdaq — together about half of world market cap) to Tokyo, Shanghai, London and Frankfurt. "Cash" distinguishes buying the actual share — settled and owned — from derivatives that merely reference it.

The participants form a food chain: retail investors and their advisors at the base, index funds and ETFs (now ~half of US fund assets) as the passive middle, active managers, pension funds and sovereign wealth funds allocating at scale, and market makers and high-frequency traders supplying the liquidity everyone else consumes. Companies themselves are major buyers via buybacks — in many years the single largest source of net demand for US equities.

What actually drives share prices

• Earnings and expectations. In the long run, share prices follow earnings per share; over months, they follow revisions to expectations more than levels.
• Discount rates. Equities are long-duration assets: when bond yields rise, future profits are worth less today — the mechanical link between rates and stock valuations.
• The equity risk premium. Stocks have returned roughly 4–6% per year above government bonds over the last century — payment for enduring drawdowns that regularly exceed 30–50%.
• Flows and positioning. Index rebalances, buyback windows, options-hedging feedback and fund flows move prices with no news at all.

How the products fit together

Start with common stock — the atom. Preferred stock trades equity upside for bond-like income and priority. ETFs and mutual funds wrap diversified baskets into single tickets — the difference is intraday tradability and the creation/redemption machinery. ADRs/GDRs import foreign shares to your home exchange, and REITs push property cash flows through the equity wrapper.

Concepts to master

Valuation always reduces to discounting. Whether dressed as P/E multiples, DCF models, or dividend yields, every valuation asks: what are future cash flows worth today? The dividend discount model is the cleanest teaching version — try it below and watch how brutally sensitive fair value is to small changes in the growth/discount gap. That sensitivity is equity volatility, explained in one formula.

What the symbols mean

• Pa price, or a present value
• Dduration: how far a bond's cash flows sit in the future
• rthe interest rate, per year
• ga growth rate, per year

Interactive: fair-value calculator (dividend discount model)Easy

Price a stock from its next dividend, required return and growth — and see why "small" assumption changes move fair value violently.

Next-year dividend $ Required return r % Dividend growth g %

Fair value P₀

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Implied dividend yield

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Dividend in 10 years

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Educational model with heroic assumptions (constant growth forever). Real analysts use multi-stage versions — but the sensitivity you see here is real.

Risks the brochure understates

Single stocks can and do go to zero — diversification is the only free lunch here. Drawdowns arrive clustered, not smoothly. And valuation discipline matters most exactly when it feels most irrelevant: buying "great companies at any price" has repeatedly cost investors a decade of returns. The product pages below give each instrument's specific risk profile.

Interactive: compound growth & savings planEasy

The least glamorous calculator on this site and the most consequential: what a starting sum plus a monthly contribution becomes when returns compound.

Starting amount $ Monthly contribution $ Annual return % Years

Final value

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Total invested

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Investment gain

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Gains as share of final value

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Assumes a constant return with monthly compounding — real markets deliver the average by way of violent detours, and costs and taxes take their cut.

Interactive: drawdown & recovery mathEasy

Losses and gains are not symmetric, and the asymmetry gets worse fast. This is the arithmetic behind every risk-management rule.

Drawdown % Expected return % p.a.

Gain needed to recover

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Years to get back

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Capital remaining

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If the drawdown doubles

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Recovery gain = d/(1−d): −30% needs +42.9%, −50% needs +100%, −80% needs +400%. Avoiding the deep hole is worth more than catching the sharp rally.

Interactive: lump sum vs. spreading it inEasy

The question every inheritance, bonus and house sale raises: invest it all now, or feed it in monthly?

Amount $ Spread over (months) Horizon (years) Expected return % p.a.

Lump sum ends at

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Spread in ends at

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Difference

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Reading

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Assumes a constant return, so lump sum mathematically wins whenever expected returns are positive — the historical evidence agrees about two thirds of the time. What spreading in actually buys is a smaller worst case and a much smaller chance of regret, which is a real benefit the arithmetic can't price.

The same questions, asked of all elevenThese sections answer the same thing on every asset class, so the answers can be read next to each other.

The units this market speaks in

• Price is per share, in the listing currency, and moves in ticks — the smallest increment the venue allows. A tick is not a percentage, and on a low-priced share it is a large one.
• Size is quoted two ways and they are not interchangeable. In shares, which is what the order book takes, and in currency notional, which is what a mandate is written in. Confusing them is the classic first-week error.
• Liquidity is measured in days of volume. "Ten percent of ADV" is a size statement, not a price one: it says how long the position takes to build or exit without being the reason the price moved. What liquidity costs.
• Performance is in percent; performance against a benchmark is in basis points. A manager who beat the index by 0.4% says forty basis points, because that is the unit the fee is argued in.
• Market capitalisation is price times shares outstanding — but index weight uses free float, which excludes what is locked up. The gap is why an index buys less of a company than its size suggests.
• An index point is not a percent. What a point is worth depends entirely on the index level, which is why futures on it are quoted with a stated multiplier. Equity index future.

Who is choosing, and who is forced

A price is set by whoever has to trade, not by whoever has the best argument. Sorting the participants by whether they had a choice explains more of what happens on a given day than any view does.

• Forced: index funds at a rebalance. When a company enters or leaves an index, every tracker must own it or not own it by the close, at whatever price the close produces. The mandate is to track, not to buy well.
• Forced: anyone meeting a margin call. Selling because the collateral demands it, in the order of what is easiest to sell rather than what one would least miss.
• Forced: employees at a vest, and shorts against a shrinking borrow. Both sell or buy on a schedule somebody else set. 2021 is the second one at full volume.
• Half-choosing: corporate buybacks. Announced in advance, executed to a programme, and often into the same closing auction as everybody else.
• Choosing: active managers, hedge funds, and the private investor. Free to do nothing, which is the only position the forced participants cannot take.

The practical use: when a price moves without news, ask who had to trade. The other side of the trade.

What a bad day looks like here

• The shape of it: not a fall, but a fall in which the exit narrows at the same time. Spreads widen, displayed size thins, and the closing auction — normally the deepest moment of the day — becomes the only moment of the day.
• The first tell: the borrow. A rising fee to short a name, and a falling number of days to cover, says the position is crowded before the price says anything.
• The second tell: a widening gap between the price of a fund and what it holds. An ETF at a discount is often the honest price and the basket the stale one. ETF against fund against certificate.
• Where it has happened: October 1987, when the hedging strategy was itself the sell order, and January 2021, from the other direction.
• The question that would have caught it: how much of the daily volume is my position, and who else holds the same one?

How a trade actually happens here

Between "buy 500 shares" and owning them lie four steps that nobody sees and everybody in operations lives inside. They are the same four in every market on this site; what changes is who performs them and how long they take.

• Agreeing it — an order book, not a conversation. The order joins a queue ranked by price and then by the time it arrived, and matches against the other side automatically. Nobody negotiates; the rules do. Market microstructure.
• Confirming it — the same second. The venue reports the fill to both brokers, and the trade exists in law from that moment, although no money and no shares have moved.
• Clearing it — the counterparty is replaced. A central counterparty steps into the middle and becomes the buyer to every seller and the seller to every buyer, so neither side is exposed to a stranger. It also nets: a broker that bought and sold the same stock all day delivers only the difference. Clearing and settlement.
• Settling it — one or two days later. Shares and cash change hands simultaneously at a central securities depository, so neither side can be paid without delivering. The United States and Canada moved to one day after trade in May 2024; much of Europe still settles on the second day and has announced the same move.
• When it fails: the seller does not have the shares on the day. The delivery simply does not happen, the buyer is not paid, and the gap is usually plugged by borrowing the stock — which is most of why securities lending exists. Left unfixed, the exchange can buy the shares in on the failing party's account, at whatever the price has become.
• Why the gap matters at all: every corporate action has a record date, and whether you are the holder on it depends on when the trade settled, not on when it was agreed. Corporate actions.

Where the spread is, and who earns it

Owning a share is the cheapest thing on this site to do and one of the easiest to pay too much for, because most of what it costs is not a line on a statement.

• The bid-offer, and why it exists. A market maker quotes both sides and earns the difference. It is not a fee for a service that could be done for nothing: the quoter loses to everyone who knows something it does not, so the spread is the price of that adverse selection. It widens exactly when the risk of being on the wrong side rises. Market microstructure.
• The commission, which may be zero. When it is, the flow is worth something to whoever receives it — retail orders are on average uninformed, which makes them the flow a market maker most wants. That value is real and it is paid for somewhere in the price.
• The fund wrapper's charge, taken daily off the value. Nothing is ever billed and nothing appears on a statement; the price of the fund is simply a little lower each day than the holdings would make it. Costs and fees.
• What the fund earns on the side. Lending out the shares it holds produces revenue, and how much of it reaches the fund rather than the manager is set in the documents rather than by the market. Securities lending.
• Tax and the depositary, on anything foreign. Withholding on the dividend, the depositary's own conversion rate, and its fee all come out before the money arrives. ADRs and GDRs.

How a position here ends

A share has no maturity, which sounds like the holder decides when it ends. Six of these seven endings are somebody else's decision.

• You sell it. The ordinary case, and the only one on this list you control.
• The company buys it back. Either quietly in the market, which is not an ending for you, or through a tender at a stated price, which is an offer you can refuse.
• It is taken over. Cash, shares, or a mix. Once acceptances pass the threshold written in company law, the remaining holders can be bought out whether they accepted or not — the choice stops being a choice at a number nobody negotiated with them.
• It is delisted. You still own exactly what you owned; there is simply no screen showing what it is worth and no easy way to sell it.
• It is wiped. Equity is the residual: in an insolvency it is written to nothing before any lender takes a loss, and that is the design working rather than failing.
• The wrapper closes. A fund can be merged into another or wound up. The holder receives cash on a date the manager chose, which in most jurisdictions is a taxable event the holder did not.
• It is diluted. Not an ending, but the version of one that is easiest to miss: a rights issue not taken up leaves the same number of shares in a company that now has more of them.

Which risk decides across this class

Every product page here carries the same five bars. Read down the class instead of across one instrument, the question changes: is this a shelf of things that fail the same way, or a shelf of things that only share a department?

Which of the five decides what, across these 11

Counted from the same table each product page prints, so the two cannot disagree. Not a rating and not a ranking: it says which failure mode drives the outcome, not how dangerous anything is.

• Market8 of 11The price of the thing moves.Decides: ADR / GDR, Closed-End Fund, Common Stock, Exchange-Traded Fund, Leveraged & Inverse ETP, Mutual Fund, REIT, Rights Issue. Matters on 3 more.
• Credit2 of 11Somebody who owes you does not pay.Decides: Exchange-Traded Note, Preferred Stock. Matters on 5 more.
• Liquidity2 of 11You cannot get out at anything near the marked price.Decides: Closed-End Fund, Preferred Stock. Matters on 9 more.
• Funding1 of 11Cash is needed before the position pays off — margin, calls, rolls.Decides: REIT. Matters on 1 more.
• Operational3 of 11The failure is in documents, systems, keys or people, not in prices.Decides: ADR / GDR, Rights Issue, SPAC. Matters on 3 more.

Market decides 8 of the 11 — which is what makes this a class rather than a list: the instruments differ in shape and fail the same way. Funding decides exactly one of them, REIT, which is the reason to read that page rather than assume it behaves like its neighbours.

The same five read across all 129 instruments →

Go deeper, and practiseLonger pieces, what an interview asks here, and a page to print.

Go deeper

Interactive: valuation quick checkEasy

Three numbers, one sanity check: what return does this P/E imply, and does it beat just owning a bond?

P/E ratio Expected earnings growth % p.a. 10y bond yield %

Earnings yield (E/P)

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PEG ratio

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Implied return (E/P + g)

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Reading

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Crude by design: earnings yield plus growth is a back-of-envelope expected return, not a valuation model. It exists to catch the cases where the envelope already says no.

How this market works

Analysis

Market mapWho is on the other side of your trade

Prices are made by participants with different jobs, different constraints and different reasons to trade. Knowing whose need you are meeting explains more about a market than any indicator.

• Index funds are now the largest holders in most developed markets. They do not have a view — they buy what the index says, on the day it says. That makes index inclusion and exclusion a real, dated flow event.
• Market makers quote both sides and want to end the day flat. They are not your opponent; they are renting you immediacy, and the spread is the rent.
• Active managers are measured against a benchmark, which makes them structurally reluctant to deviate far from it. Much of what looks like conviction is tracking-error budgeting.
• Corporates themselves, through buybacks, have been among the largest net buyers of their own market for a decade. That flow is pro-cyclical: it is largest when cash is plentiful and prices are high.
• Retail is a small share of volume and a large share of the narrative. In individual small-caps that reverses, which is why those are the names where crowding matters most.

Costly mistakesThe five mistakes that cost the most here

Not a list of ways to be clever — a list of the errors that recur, why each one is structural rather than careless, and which tool on this site settles it.

• Judging a company by its share price history. The price says what other people paid, not what the business is worth. Every valuation question starts after the chart is closed.
• Confusing dividend yield with return. A yield that rises because the price fell is a warning. Read it alongside the payout ratio and the cash flow that funds it.
• Ignoring the currency. A foreign holding is two positions. Over a decade the currency can be the larger one, and it was never the decision you thought you were making.
• Buying an unfamiliar index because the name sounds broad. Country, sector and single-stock concentration inside an index vary enormously — read the top ten holdings before the fact sheet's headline.
• Trading with market orders in thin names. A market order takes liquidity at any price. In a thin book that is a real and avoidable cost.

What an interview asks here

Equity questions are rarely about valuation. They are about what a share is a claim on, and what happens to that claim when something else in the capital structure moves.

Try each one out loud before you open it. What is underneath is the shape of a complete answer, not a script — somebody who can produce those parts in their own words can also answer the four variations that follow, and somebody who has memorised a paragraph can answer one.

Q1What is a share, precisely?

What it is checking. The simplest question on the desk and the one most often answered with a metaphor.

A complete answer contains:

• A residual claim: whatever is left after every other claim on the company has been met, with no maturity and no promise of payment.
• It carries a vote, which is the mechanism by which residual owners choose the board.
• Liability is limited to what was paid for it, which is what makes it sellable to strangers.
• Its value is the present value of what it will eventually distribute, which is why a company that never pays anything out has to have a reason.
• And it is last in a restructuring, which is the whole of its risk in one sentence.

Read it properly: Common stock · What a share really is

Q2A company doubles its debt and nothing else changes. What happens to the equity?

What it is checking. Whether leverage is understood as a change in the shape of the claim rather than as a number.

A complete answer contains:

• Return on equity rises in good years and falls further in bad ones — the same operating result, amplified.
• The cost of equity rises with it, because the claim is riskier, so a higher expected return is not free money.
• Enterprise value is roughly unchanged in a frictionless world; what changed is how it is divided.
• In practice the tax shield and the cost of distress pull in opposite directions, which is where the real answer lives.
• And the equity starts to look like an option on the enterprise value, which is why it can have value even when the company is technically insolvent.

Read it properly: Leverage · Bond vs. share

Q3Earnings per share rose and net income was flat. Explain.

What it is checking. A ratio question that catches people who read the numerator only.

A complete answer contains:

• EPS is a ratio, and the denominator is a management decision.
• Buybacks reduce the share count, so the same income is divided among fewer shares.
• The number to check is the net share count, because issuance to employees can offset a whole buyback programme.
• Other explanations: a change in the diluted share count as options move out of the money, or a disposal removing a minority interest.
• None of this is a change in the business, which is the point of the question.

Read it properly: Corporate actions · What a share really is

Q4Why do index funds have to trade on a specific day?

What it is checking. Whether the candidate knows that a large part of daily volume has no opinion at all.

A complete answer contains:

• An index fund's mandate is to track, so it must hold what the index holds, at the weights the index uses.
• When the index changes — an addition, a deletion, a free-float revision — the fund must match it, and the tracking is measured against the index's own effective date.
• So a rule becomes a large, dated, publicly known trade with no view behind it.
• That is why an index addition moves a price, and why the move frequently reverses afterwards.
• It is also the cleanest example of a forced participant, which is what actually sets prices at the margin.

Read it properly: ETF · What an index really is

Q5Why would you use a limit order rather than a market order?

What it is checking. Microstructure in one question, and the trade-off has to be stated in both directions.

A complete answer contains:

• A market order guarantees execution and not price; a limit order guarantees price and not execution.
• In a thin book a market order takes liquidity at whatever prices are there, which can be far from the last trade.
• The cost of a limit order is the trade you did not do, which is invisible and can be much larger than the spread you saved.
• So the choice is really about how much you mind not trading at all.
• And in size, neither is the answer — the order gets worked, and the comparison is against a benchmark rather than against a screen price.

Read it properly: Market vs. limit · Market microstructure

Q6What is the equity risk premium and why should it exist?

What it is checking. A concept question where a confident wrong answer is common.

A complete answer contains:

• The excess return equities have delivered over a risk-free asset, on average, over long samples.
• The plausible reason is compensation for bearing drawdowns that are genuinely hard to sit through — no pain-bearing, no premium.
• It is estimated rather than observed, and estimates from different periods and methods differ materially.
• Which matters because it is an input to every cost of equity, and therefore to every discounted cash flow.
• So quoting it to one decimal place is a claim about precision that the evidence does not support.

Read it properly: Valuation · WACC

Q7A stock yields 9%. What is your first thought?

What it is checking. Whether the candidate treats yield as an input or as an output.

A complete answer contains:

• Yield is dividend divided by price, so a high yield usually means the price fell rather than the dividend rose.
• So the first question is what the market is pricing about the dividend's sustainability.
• Check the payout ratio and the cash flow cover, not the earnings cover — dividends are paid in cash.
• Check whether the dividend is being funded by borrowing or by asset sales, which is a different thing from being funded by the business.
• The answer is descriptive, not a view on the stock: a high yield is a question rather than an opportunity or a warning.

Read it properly: Common stock · What yield means

Do these against a clock → — one at a time, ninety seconds each, answer before you look.

Whose questions these are. Every question on this page was written for this publication. None is taken from anybody else’s question bank, and none is a claim about what any named firm asks — that is neither verifiable from here nor ours to assert. They are our own reading of which mechanism a question of this kind is testing. Information and education only.

Test yourself: five questions

Five quick questions on this asset class — checked entirely on your device, nothing stored or sent. Wrong answers come with explanations; the deep dives above hold every answer. For education only.

⬇ The whole class on one printable page

Who pays whom, drawn

The payoff charts on this site say what an instrument is worth at the end. These say who the parties are and what each one hands over — every payment between the investor and the bank on the other side, in the order it happens. Each diagram sits on its product's own page. 3 of them carry a second diagram, folded shut, for what happens after the bargain is struck — clearing, delivery, custody. That half is deliberately separate: a clearing house is not a party to the bargain.

• Common Stock — What you pay, and what the company ever pays you
• Preferred Stock — Where a preferred dividend sits in the queue
• Exchange-Traded Fund — What you pay for an ETF, and what it costs you to hold
• REIT — Rent, from the tenant to you
• Mutual Fund — Subscribing to a fund is not buying from anybody
• ADR / GDR — What actually reaches you from a foreign dividend
• Closed-End Fund — The fund is not on the other side of your trade
• SPAC — The trust account, and the two ways out of it
• Rights Issue — What a right is, and what happens if you ignore it
• Leveraged & Inverse ETP — Where the leverage actually comes from

Who does this: Cash Equities is quoted from five sell-side seats — Sales, Trading, Structuring, Research, Prime Services — and held from the buy-side by Asset Management, Private Markets, Hedge Funds & Alternatives, Wealth Management, Insurance & Pensions. See the industry map.