While similar to a great extent and often used interchangeably, equities and stocks are terms that have certain differences.
Equity relates to total ownership share or stake in any business entity (or company). The term equity is associated with the net worth of a company. For instance, if you have 20% equity in a company, you own 20% of that particular company and are entitled to 20% of the company’s profits.
Generally, there are two forms of equities: private and public equities.
The term private equity denotes shares of ownership in companies that are not (or not yet) listed on a stock exchange. On the other hand, the term public equity, also known as shareholders’ equity, refers to shares of companies that already trade on a stock exchange.
While equity describes complete ownership, stocks are financial securities that represent part ownership in one or more companies. On buying a company’s stock, you become a shareholder of that company. Stocks could be bought for one or multiple companies.
There are two common forms of stocks: common and preferred stocks.
Common stocks, also known as equity shares, relate to financial security that represents partial ownership in a company and provides the holder with voting rights.
On the other hand, preferred stocks or shares usually don’t grant voting rights. However, preferred stockholders have priority in receiving dividends and may receive higher dividends than common stockholders.
While all stocks are equities, not all equities are stocks and the following are the key differences.
Unlike stocks, equities are not traded on stock exchanges. Equities do not involve the participation of the general public as is the case in stocks.
Stocks experience fluctuation in prices daily depending on the demand and supply of the stock. Prices of equities do not experience any such fluctuation.
The number of stocks multiplied by the price of stocks provides the market valuation of a company. The number of equities multiplied by the face value of equity highlights the book value of a company.
On the balance sheet of a company, the value of equity is disclosed unlike in the case of stocks.
The value of stocks is considered during mergers and acquisitions (M&A) to determine the valuation of a company. The value of equities is not considered during M&As.
For an equity share to be termed as a stock, equity needs to be listed on one of the stock exchanges compulsorily. However, equities need not necessarily be listed on stock exchanges.
To sum it up, equity relates to the amount of capital invested by a promoter or partner of a company and in return holds the ownership of the company. On the other hand, stocks are equity shares issued to the general public to raise capital in return for an ownership share in a particular company.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
