Stocks
A claim on a business. The only class here where an instrument can move 20 percent overnight on one scheduled event.
11 min read · beginner · lesson 3 of 6
What this covers
- Separate what a business earns from what the market pays for those earnings
- Use market capitalisation and float to judge how an instrument will behave
- Separate company-specific risk from market and sector risk
- Explain why equities gap and what that means for stops
- Account for corporate actions and extended-hours trading
What you own
A share is a fractional claim on a business: its assets, its earnings, and whatever the market decides those are worth today. Unlike a currency pair, there is something underneath it that can grow or fail.
Price combines two separate things. What the business earns, and what multiple the market pays for those earnings. A company can grow earnings and still see its shares fall because the multiple contracted. Most large moves are multiple, not earnings.
That split explains most of what looks irrational in equities. A strong report followed by a fall means the multiple came down, usually because the forward view changed. The business did well and the price of owning it did not.
Size, float and volume
- Market capitalisation
- Share price multiplied by shares outstanding. The rough size of the company, and the strongest single predictor of how the instrument behaves.
- Large, mid and small capitalisation
- Large names carry tight spreads, deep books and slower moves. Smaller names carry wider spreads, thinner books and larger percentage moves on the same amount of capital.
- Float
- The shares actually available to trade, which is lower than shares outstanding once insider and restricted holdings are excluded. A low float concentrates every buy and sell into a small pool, which is why some names move violently on ordinary volume.
- Volume
- The number of shares traded, consolidated and published. Equities and exchange-traded futures both have a complete volume figure because every trade clears through an exchange. Forex and crypto do not, because neither settles through a single venue.
Two kinds of risk in one instrument
| Company-specific | Market |
|---|---|
| Earnings, guidance, management, litigation, product. | Rates, risk appetite, sector rotation, index flows. |
| Diversifiable. Holding twenty names dilutes it. | Not diversifiable. Holding twenty names concentrates it. |
| Drives the gaps. | Drives the drift. |
| Specific to the name. | Shared with every other equity you hold. |
Sectors move together
Companies in the same sector share drivers. Rate-sensitive sectors reprice together when yields move; energy names move with the underlying commodity whatever their individual results.
This is the layer between company-specific and market risk, and it is the one most often missed. Holding five technology names is closer to holding one large technology position than to holding five independent positions, and it will behave that way on the day the sector reprices.
Capital also rotates between sectors rather than leaving the market. A falling sector and a rising one on the same day is frequently one flow, not two independent stories.
The reaction is to the guidance
Companies report on a published schedule, and the report contains two things: what happened last period, and what management expects next.
The market has already priced an expectation for the first. What moves the share is the gap between the expectation and the result, and more often the forward guidance, because that is what resets the multiple. A company can beat on the period just reported and fall hard on a weaker outlook.
Earnings dates are known in advance. Holding through one converts a position into a bet on a binary event with a distribution the analysis has no view on, so it should be a deliberate choice rather than something discovered afterwards.
Equities gap, and extended hours are not the regular session
Cash equity markets close. Earnings, guidance and regulatory news land outside hours, and the first print of the next session can sit far from the last.
A stop-loss does not hold through a gap. It becomes a market order at the open and fills at whatever is available, which on an earnings miss can be well beyond the level. This is the single most important structural difference from continuously traded markets, and it is a position sizing problem rather than a stop placement problem.
Pre-market and after-hours sessions exist, and prices there are not comparable to regular-session prices. Participation is a fraction of normal, spreads are wide, and a large percentage move on a few thousand shares frequently does not survive the open. Reading an extended-hours move as the market's verdict is a common and expensive error.
Corporate actions
- Stock split
- The share count changes and the price changes to match. Nothing about the company changed. Historical charts are adjusted, so a split creates a discontinuity in unadjusted data and none in adjusted data.
- Dividend
- Cash paid to holders. The share price drops by roughly the dividend on the ex-dividend date, which is a mechanical adjustment rather than a sell-off.
- Index inclusion
- Joining or leaving a major index forces every fund tracking it to buy or sell, producing flow unrelated to the business.
Short interest
Equity positioning is visible through short interest: the proportion of a company's shares currently sold short. It is reported on a lag rather than in real time.
A heavily shorted name carries the asymmetry covered in the positioning lesson. Closing a short means buying, so a rally forces buying that drives further rally. The crowding does not predict direction; it changes how a move in each direction behaves.
Short interest is read against float rather than against shares outstanding. A modest short position in a low-float name is a far more crowded trade than the headline percentage makes it look.
What PecuDesk covers
A curated core of 106 US equities across 10 sectors, read continuously and with sector-level views alongside the individual names. Several thousand further US tickers can be scored on demand.
Equity pricing is delayed by roughly 15 minutes, which is fine for structural reading and unsuitable for execution timing.
Key takeaways
- Price is earnings multiplied by a multiple. Most large moves are the multiple.
- Capitalisation and float predict behaviour. Low float concentrates every order into a small pool.
- Sector is the missed layer. Five names in one sector is closer to one position than five.
- The reaction is to the guidance, not to the period just reported.
- Equities gap through stops. Size for the gap rather than trusting the stop.
- Extended-hours prices are not regular-session prices and frequently do not survive the open.
Common mistakes
- Sizing an equity position as though the stop caps the loss through earnings.
- Holding twenty correlated names, or five in one sector, and calling it diversification.
- Reading a large after-hours move as the market's settled verdict.
- Reading short interest against shares outstanding rather than against float.
Knowledge check
OptionalRelated
- OptionsAsset Classes
- Position sizing and risk per tradeMarket Foundations