This is a guest post from a reader who broke into Sales & Trading (S&T) coming from a non-target school. In Part 5 of this series, you’ll learn all about sales & trading interviews and how to answer the technical and markets-based questions, pitch stocks and investment ideas, and yes, even calculate the square root of 58 in your head.
“The markets are tanking!”
“I just got whacked on RIMM…”
“Europe is going down…”
“Greece is being auctioned off in pieces.”
“China is about to have hard landing…”
“The US unemployment rate is stuck at 8.3%!”
Ah, yes, the fun part of a sales & trading interview.
You better walk in with your best investment ideas, coherent thoughts on current events, and an impressive ability to do square roots in your head.
Or you’ll walk out without an offer.
The good news is that just like with the “fit” side, it’s possible to prepare for the markets, math, and brainteaser questions you’ll get.
The bad news is that it can be more time-consuming, and there’s no way to predict every single question in advance.
Here’s how you can get started preparing for markets, math, and brainteaser questions:
As I mentioned in the last article, first round interviews in S&T tend to be mostly fit-based.
Past that, it rapidly shifts to market-based questions – maybe around 60 to 80 percent of questions in later rounds will be related to the markets, with the rest divided between additional “fit” questions and math / brainteaser questions.
So you need to spend the bulk of your time preparing for all these market-related questions.
Market Mayhem: What to Expect and How to Prepare
There are 5 big categories of questions here:
- Tell me about a recent article (or recent trend) you read in the Wall Street Journal.
- Pitch me a stock (or other trading idea).
- If you had $10 million (or other large number), how would you invest it?
- Tell me about major world events.
- Tell me what major indices / commodities / FX rates / bond yields / LIBOR etc. are at and why that’s the case.
There are more potential questions, of course, but if you have good answers to these you’ll be well-prepared to handle variations.
The answer to many of these questions: “Read (or at least skim) the Wall Street Journal cover-to-cover, every day – and anything else you can get your hands on.” Never, ever miss reading it or you’ll be in for a shock when you show up for your interview.
If you’re a student, get a university discount or share a subscription with a friend or find any other way to access it that you can.
You can read other newspapers, blogs, and finance-related sites, but never skip the WSJ for any reason – especially not if you have an interview that day.
Recent Article / Trend Discussion
Try to find something on a “sexier” topic, not something mundane (e.g. the unemployment rate, the trade deficit…).
Opinion articles and editorials are very good for these types of questions. Examples:
- The Real Causes of Income Inequality – It’s Not What You Think
- Why High-Frequency Trading Helps the Markets
- The Real Way to Fix Europe’s Economy
If you’ve passed middle school, you understand how to discuss an article: state the main idea, the supporting reasons, and then whether you agree/disagree and why.
As a trader you’ll constantly have to read the news, evaluate it, and see if you can use it in your own trading strategies.
The most common mistakes here:
- Picking a company that is well-known and that everyone else is analyzing (Apple, Google, Facebook, Microsoft).
- Not backing your stock pick with solid reasoning (both quantitative and qualitative).
- Not knowing key information about a company such as their leadership, strategy, key valuation multiples, and so on.
And yes, I mentioned that I pitched Apple back when I was networking… but back then it wasn’t as well-known, and it was just for networking purposes rather than an official interview.
How can you find stock ideas to pitch?
- Read sites like Seeking Alpha, follow successful investors on Covestor, and read about recent deals and corporate news in the WSJ to get some initial ideas for companies.
- Take a “tops-down” approach and pick an industry you’re interested in, get some equity research (free with a TD Ameritrade account) or research it online, and determine the most promising companies in that market.
- Pick a big trend in the world (emerging markets, software-as-a-service, unconventional energy resources, etc.) and find a company that can take advantage of it.
- Aim for 60 – 90 seconds – more than that and they’ll lose interest.
- Start by giving the company’s name, briefly describe what it does, say whether you like it or don’t like it, whether you’re long or short, and the price target.
- Give 3 supporting reasons that explain your thinking and why you think the stock’s price and value are different.
- Estimate the potential upside from the stock in a certain timeframe, and how you plan to exit the investment.
- Give the potential risks and how you could hedge against those.
Example stock pitch: “I like Aero Dynamix, a leading manufacturer of commercial aircraft engines. It has about $500 million revenue and $100 million in EBITDA and trades at around $20.00 per share, at a P/E of 10x, vs. 11-12x on average for its competitors. I like them and think the price could rise to $25.00 per share, for a P/E of 12x, in the next 12 months.
Right now, they’re undervalued by about 20% vs. competitors because prices and demand have declined in some of their key markets in Europe. But they’ve just gotten started expanding in China, where there’s far more growth, and 10% of their revenue will come from there by the end of the year.
Also, oil prices have fallen 15% in the past several months but that hasn’t been factored into their price yet. As those lower prices move through the system, air ticket prices are likely to decline, which should push up traffic and cause companies to invest in more aircraft, which will help the company.
Finally, they operate at higher margins than the rest of the industry but haven’t received credit for that yet because the market over-reacted to bad news in one of their regions.
The time frame for this investment is 12 months, with a target price of $25.00. I would set a stop loss at $18.00.
The main downside risks are a general market decline, which could be hedged by shorting a broader index, and stagnation in emerging markets, which you could hedge by longing a defensive or blue-chip index or anything else not dependent on developing countries.”
You may get more questions after this initial pitch – they’re likely to ask you more about the risks, how it’s valued vs. competitors, institutional ownership, and what specifically this company has that competitors do not.
The best way to know all this is to get free equity research from a service like TD Ameritrade or other online brokerage accounts and read through reports and online sources that discuss the company.
Trading Ideas vs. Stock Pitches
You may also get asked about “trading ideas” rather than pure long/short stock pitches, so you should have a few thoughts on macro, FX, options, and related plays.
During my interviews, I talked about how the Hong Kong dollar had been pegged to the US dollar for the past 30+ years, and how trading algorithms did not price FX options correctly because the peg had lasted for so long.
I told them that I thought the peg would be removed, as the HKD was undervalued, and the only way for it to appreciate was by removing the peg.
Therefore, purchasing call options on the HKD vs. USD could be an investment with a huge payoff.
I went into more detail than that as the conversation progressed, but this was something that few other interviewees mentioned and so it set me apart.
This was not my original idea, but it didn’t matter – as long as you can back up why you think it’s a good investment, it’s fine.
You need to have examples like this in your back pocket if you really want to stand out.
The $10 Million Investment
These questions are related to the ones above about stock pitches and trading ideas, but diversification is the key element here. You’d be foolish to invest $10 million all into one asset… unless you had another spare $500 million lying around.
So you need to go into detail on the different asset classes you’d invest in, the percentage allocation into each one, and why that makes sense given your investment goals.
You would start by asking for their goals (or stating your own), and then give an estimate of the percentages across different classes such as equities (large-cap, mid-cap, small-cap, international, etc.), fixed income, cash, real estate, commodities, and alternative investments.
It’s fairly straightforward… if you’re younger and can afford more volatility, aim for high returns even at greater risk, and as you get older you aim more for capital preservation and possibly income generation and tax benefits.
Major World Events
There isn’t much to say here – simply put, know what’s going on in the world, from various financial crises and natural disasters to macro indicators like unemployment, new housing starts, GDP growth and inflation, and so on.
If it’s an election year you will be asked about how different parties can impact the markets. Make sure not to pick a side – just show that you are knowledgeable about the impact of the different results.
Rates, Indices, and Commodities
There isn’t much to say here because it’s a matter of following the key numbers each day.
One overlooked point is that you also need a sense of how these have been trending over time – the past few years, the past 6 months, and then where they might go in the future.
You should use Bloomberg.com and markit.com to get all this information:
- Equities: US – DJIA, S&P 500, VIX; Europe – Estoxx, FTSE 500, VStoxx; Asia – Nikkei
- Credit: CDX NA IG, CDX NA HY, iTraxx Europe, iTraxx XO; SovX WE, SovX CEEMEA
- FX: EUR / USD, USD / JPY, GBP / USD, RMB / USD
- Commodities: Oil and gold
- Interest Rates: LIBOR, Fed Funds rate, 2-year and 10-year Treasuries
No, you don’t need to memorize every one of these, but you should have an idea of the most important ones for your region.
If you went in and could not answer how oil prices have changed over the past 12 months, your chances would not be good.
Brainteasers and Mental Math
So that’s what you need to prepare for on the markets side.
In some ways it’s actually easier than investment banking interviews because you don’t need to learn about specific topics like merger and LBO models, and it’s more about backing up your answer with solid reasoning rather than being “right” or “wrong.”
But brainteasers are harder to prepare for.
Technically you could get these questions in banking or consulting interviews, but they’re the most common in sales & trading interviews.
The logic behind them: stress test you, and see how analytical you are under pressure.
No, you won’t have to answer brainteasers on the job in S&T but you will be under constant pressure all day, and if you make a mistake you could easily get fired.
Unfortunately, there’s no “formula” for answering these questions – all you can do is practice repeatedly and look online and in books for common questions.
While Vault is normally useless, they sometimes have good sample brainteasers so you should get their S&T guide or any other book on brainteasers that you can find.
Chances are that if you practice enough, you’ll start seeing variations of the same questions being asked… which makes it easier for you.
The most important points with brainteasers:
- Always think out-loud and walk the interviewer through your thought process.
- Explain where assumptions come from and how you got there.
- If you get stuck, explain what you need to do next to continue… and they might point you in the right direction.
If you get the same brainteaser twice, I highly recommend telling the interviewer.
Doing so demonstrates your honesty and shows how you’re different from many other candidates who wouldn’t necessarily act that way.
And after widespread insider trading and securities fraud, honesty is becoming more and more highly-valued in the industry.
I actually had this happen and told the interviewer that I had already heard a particularly difficult brainteaser that he gave me – he told all his co-workers afterward that I was upfront with him, and eventually I won an offer there.
Mental Math Mayhem
You must be quantitative and good at mental math if you want to work in sales & trading – that’s one of the ways it’s different from other markets-based roles like long-only asset management, value-oriented hedge funds, and so on.
Technically they could ask you anything here, but a few types of questions come up repeatedly:
The key here is to break up “ugly” numbers into round ones. Examples:
- 97 + 55 = (97 + 50) + 5 = 147 + 5 = 152
- 334 + 567 = (300 + 567) + 34 = 867 + 30 + 4 = 897 + 4 = 901
Subtraction questions are similar but you need to decide when to round up – if, for example, the number’s second digit is bigger than the second digit of the number you’re subtracting from (e.g. 62 – 27). Examples:
- 62 – 27 = 62 – 30 + 3 = 32 + 3 = 35
- 934 – 478 = 934 – 500 + 22 = 434 + 22 = 456
- 934 – 437 = 934 – 440 + 3 = 494 + 3 = 497
When you’re multiplying a 2 or 3-digit number by a 1-digit number, it’s fairly straightforward because you just separate them into smaller groupings:
- 47 x 5 = (40 x 5) + (7 x 5) = 200 + 35 = 235
- 432 x 6 = (400 x 6) + (30 x 6) + (2 x 6) = 2400 + 180 + 12 = 2592
It gets trickier when you have 2×2 multiplication or beyond (better hope they don’t give you a 5×5 in an interview).
The trick is to put the number with the larger second digit first and then group them into smaller units once again:
- 43 x 87 = 87 x 43 = (87 x 40) + (87 x 3) = (80 x 40) + (7 x 40) + (80 x 3) + (7 x 3) = 3200 + 280 + 240 + 21 = 3480 + 261 = 3680 + 61 = 3741
You’ll have to keep track of some larger numbers in your head, so I recommend saying the numbers out-loud when you go through the calculation.
This is easy if you’re asked to square 6 or 7, but most interview questions involve 2-digit numbers.
The trick is to use this formula:
- X^2 = (X + Y) * (X – Y) + Y^2
And then you set Y such that either (X + Y) or (X – Y) end with “0.” Examples:
- 89 ^ 2 = (89 + 1) * (89 – 1) + 1^2 = 90 * 88 + 1 = 90 * 8 + 90 * 80 + 1 = 720 + 7200 + 1 = 7921
- 56 ^ 2 = (56 + 4) * (56 – 4) + 4^2 = 60 * 52 + 16 = 60 * 50 + 60 * 2 + 16 = 3000 + 120 + 16 = 3136
Ah, now for the fun part… it’s harder to apply “tricks” to square roots because you’re almost always going to end up with numbers that have decimal places.
So you should think in terms of square numbers instead. Let’s say they ask you the square root of 58…
- Think, 7 ^2 = 49
- And 8 ^ 2 = 64
- 58 is closer to 64 than 49, so the answer must be above 7.5 and below 8.0
- So you can say “approximately 7.7” – it’s actually 7.6, but your guesstimate is close enough.
Another common question: what is the square root of .9?
You might instinctively say, “0.3!” or “0.03!” but you would be wrong.
Once again, think in terms of known squares: 0.9 is close to 1, and 1 ^ 2 = 1… so the square root of 0.9 is “approximately 1” (0.95 to be more exact, or you can just say “slightly less than 1”).
What if you’re interviewing with a sales desk rather than a trading desk?
Well, you’ll still get all the markets-based questions because you need to know those regardless of your role.
Brainteaser and mental math questions are less likely to come up, but you should still know the basics because you might have to answer questions from clients or traders on-the-spot.
As mentioned in Part 1, they do focus more on your communication and selling skills – but it’s not a great idea to skip the math and brainteaser prep altogether.
Your Interview Prep Checklist
So when your interview is coming up tomorrow… or in a week… or very soon, here’s what you need going into it:
- Your “story” and why you want to do S&T over anything else – including related fields like asset management and equity research.
- 5-6 anecdotes from your resume that demonstrate the skill set needed in S&T, and an idea of how to re-use them for many “fit” questions.
- Knowledge of all the market indicators mentioned earlier, plus a sense of how they’ve changed in the short-term, long-term, and how they might change going forward.
- 3 stock pitches, with at least 1 long idea and 1 short idea.
- 1-2 trade ideas – FX, global macro, volatility, or anything else.
- 1 recent article or world event and your opinion on it.
- At least a few hours of practice with mental math and brainteaser questions.
The problem is that many people complete some of this process, but not everything. Or they only complete part of one step, fail to understand the overall process, or aren’t specific enough with why they want to be in S&T…
Which is sort of like making a trade but then not hedging yourself properly: you could make money, but you could also lose everything if the market moves against you.
Proper interview prep is the same as properly hedging your trades: you’ll never lose everything, and you’ll do better than everyone else on average.
And you might even do the impossible and win multiple sales & trading offers – even if you’re from an unknown school with no on-campus recruiting.
Coming Up Next
That’s it for this series, but we’re always looking to add new material on Sales & Trading. And yes, I’m aware that we haven’t featured much on Sales yet (more coming soon).
What else do you want to know about? Leave a comment below and we’ll add it to the list.
- Sales & Trading Recruiting, Part 1 – Overview
- Sales & Trading Recruiting, Part 2 – Networking
- Sales & Trading Recruiting, Part 3 – Resumes
- Sales & Trading Recruiting, Part 4 – Interviews – Your Story and “Fit” Questions
- Sales & Trading Recruiting, Part 5 – Interviews – Markets, Brainteasers, and Mental Math