Equities vs. Stocks—Definitions, Examples, and Investments
Updated · Sep 01, 2022
Can you fill in the blanks?
- ____ are ownership shares in a company.
- ____ can be traded on an exchange market.
- Some ____ pay out dividends.
Whether you guessed “stocks” or “equities,” you’re right. There’s a big overlap, so the terms are often used interchangeably.
All the same, they could also refer to completely different concepts.
Below, we make a detailed equities vs. stocks comparison.
Read on for the full definitions and examples.
What Does Equity Mean?
Equities are ownership shares or the value of an asset minus all associated debts.
In real estate, home equity is the property’s worth minus the loan or mortgage associated with it. In other words, it’s the sum the owner will gain if they sell it.
In accounting, equity is the company’s book value expressed in terms of its total assets minus liabilities. If the liabilities exceed the assets, the equity is negative.
Equity is also part of the calculations of business performance metrics.
For example, return on equity (ROE) indicates the profitability of a company. It is derived by dividing the net profit by the shareholders’ equity.
But the meaning of equity we’re mostly interested in here is in the context of investments.
What Is Equity in the Stock Market?
In some cases, businesses raise money using a method called equity financing. This means that they sell ownership shares (equities) to investors.
In other words, they convert equities into stocks. So, in the stock market context, equities are company shares listed on stock exchanges.
Now, let’s see how that process works.
What Are Stocks and How Do They Work?
In the context of investments, the terms stocks and equities can be used interchangeably. The equity market is essentially a stock exchange.
As we mentioned, equity financing is a common method for raising money by selling stocks. Depending on size, a company can have between one and over 100 million shares.
The process of listing stocks for public trading is lengthy and heavily regulated by the government. As an alternative, businesses can use debt financing and sell bonds on the debt market.
Bonds allow companies to borrow money from investors and repay them with interest after a certain amount of time. The interest usually comes in intervals in the form of dividends.
Equity investments may come with voting rights. In addition, they allow shareholders to profit from capital gains or dividends.
However, both depend on the type of stocks.
Types of Stocks
Common stocks come with certain benefits like voting on corporate policies and board elections. That said, not all pay dividends. In addition, their prices tend to fluctuate a lot, and they’re more suitable for active trading.
In contrast, preferred stocks have guaranteed dividends but rarely come with voting rights. Their price is generally stable, but they have less potential for growth. They combine features of stocks and bonds and are a great addition to a fixed-income portfolio.
That covers the main aspects of the two terms.
Now let’s focus on the differences in equity shares vs. stocks.
Equities vs. Stocks
The main difference between stocks and equities is that the former are listed for trading. In other words, all stocks are equities, but not all equities are stocks.
What’s more, there are two types of tradable equities. Private, which are not listed on a public exchange but are offered only to a handful of investors. There’s also public or shareholders’ equity. This one is used synonymously with stocks.
There are also some differences in terms of price fluctuations.
By definition, equities are ownership parts, so their worth is stable. What does change is the organization’s financial performance and market prices. In contrast, stock prices vary daily depending on the security's demand and supply.
Last but not least, equity is used to calculate book value. With stocks, we can find the market value.
The two metrics indicate slightly different aspects of businesses’ financial performance.
The former is an accounting term indicating the amount investors would receive if the company pays off all liabilities and liquidates its assets.
The latter reflects the company’s worth derived from the current market demands and the outstanding supply of shares.
Equities are ownership shares, and stocks are publicly traded equities.
In that sense, we can use the two terms interchangeably, but there are some key distinctions.
We discuss all nuances in the meaning of equities vs. stocks above.
With an eye for research, Aleksandra is determined to always get to the bottom of things. If there’s a glitch in the system, she’ll find it and make sure you know about it.