Average equity is an individual investor’s average balance in a trading account. A trading account is often provided by a broker to hold a customer’s financial securities and other assets, which are known as the customer’s equity. Brokers need to know their customers’ equity in order to optimize the services they offer. Many investors, however, employ strategies that involve frequent trading of securities and, therefore, it can be difficult to gauge general trading patterns. Average equity can be a more useful way to gauge an investor’s trading.
The term equity can have many different meanings, but it is generally used to refer to a value given by ownership. In the context of investing, equity includes financial securities such as stocks and options. Stocks are a form of ownership in a company—a company typically issues a fixed number of shares of stock that fluctuate with the value of the company itself. In a public company, these shares are available to the public for anyone to purchase as an investment. Equity can refer to the total value of stocks owned by an investor.
In practice, a broker or brokerage firm may offer its investors a trading account for managing their financial securities. A trading account is particularly useful when an investor wishes to buy and sell stocks frequently. The account is a convenient interface in which stocks can be managed. Stock brokers can provide varying levels of involvement in an investor’s decisions—some brokers charge premium fees to advise on nearly all decisions, while some merely offer access to an account in which the investor can trade.
Brokers who manage customers’ trading accounts have an interest in knowing how much equity their customers have. This information can help them plan future services, because their commission is often affected by their customers’ equity. High equity will typically correlate to high broker commissions. Therefore, brokers will characterize their customers based on the equity of their trading accounts. This can help them make decisions that will maximize the return on the services they offer.
Depending on an investor’s behavior, the balance in a trading account may fluctuate widely. For this reason, brokers often use average equity as a more useful measure of their customers’ equity. Average equity in a trading account is much more important than instantaneous equity for many customers. Brokers may use a variety of ways to measure their investors’ trading patterns, but average equity continues to be one of the quickest ways to evaluate an investor.
