You’re starting your day, and the news is talking about equities and stocks, terms you may have heard hundreds of times in the past. But what exactly do each of these terms mean?
Although investors might often use the two terms interchangeably, they aren’t always the same thing. For instance, stocks are always traded publicly, whereas equities may not be. What the two have in common is that they both refer to an ownership stake in a company.
Let’s break down the similarities and differences between equities and stocks to understand their potential placement in your portfolio.
What are equities?
The definition of equities is not always clear-cut and might depend on language and local variations. Equity refers to an ownership share or stake in a company. If a company goes bankrupt and is liquidated, those with equity are entitled to its assets, but only after it pays off any outstanding debts.
The term equity could also be used more broadly beyond the partial ownership of a company. For example, you may have heard of making payments on your mortgage referred to as building equity. That usage refers to equity as a broad form of ownership and is not necessarily limited to owning a stake in a company.
Here are two of the most common forms of equity:
Private equity refers to the partial ownership of a company that is not traded on a public exchange. As with other forms of equity, private equity investors have ownership stakes in the companies they own equities in.
The ownership stake a person has in a company they invest in could be large. When this stake is larger than 50%, it’s known as a majority stake. Investors owning such large stakes in companies might often be private equity firms.
Privately traded companies may issue equity shares, a unit of ownership. However, these shares are not publicly traded. This means you won’t find them listed in any stock market as long as the company is not public.
Public equity, also known as shareholders’ equity, refers to the partial ownership of a company that could be traded on a public exchange. This type of equity divides a company into stakes that could be traded by anyone without restricting access to a handful of investors.
Shareholders’ equity is the type of equity you might hear used interchangeably with stocks. After all, one of the biggest pieces of shareholders’ equity is common stock or common share, a type of ownership stake that is often publicly traded.
What are stocks?
As with equity, stock ownership gives the purchaser a stake in a company. Because stocks represent ownership in a company, all stocks are equities. However, not all equities are stocks.
Companies issue stocks to raise capital. If it’s the first time a company offers public stocks, it would be called an initial public offering (IPO). This process exposes the value of the company to fluctuations in the stock trading market.
Companies might do this for various reasons, such as expanding production or paying back debt. In exchange for helping a company raise capital, shareholders get an ownership stake in the company.
Shareholders may benefit from asset appreciation in the form of an increase in the stock's market value. In some cases, they may also receive dividend payments and be able to vote at shareholder meetings.
However, companies might sometimes choose not to pay dividends to their shareholders, and not all stocks come with voting rights.
Here are the most used forms of stocks:
Common stocks are usually the majority of stocks a publicly traded company issues, which is why they’re described as common. When you hear about various stock prices in the news or on TV, it usually refers to the price of the company’s common stock.
You typically buy common stocks when investing money in a publicly traded company. This type of stock usually grants voting rights and might receive dividends. However, it also has the lowest priority in the event of liquidation, which means common stockholders would be the last to receive any proceeds if a company goes bankrupt.
Preferred stocks usually don’t grant voting rights as common stocks do. However, owners of preferred stocks have priority in receiving dividends and might receive higher dividends than common stockholders.
Preferred stocks are exposed to market forces such as supply and demand, but their value might not experience the same volatility as common stocks. Preferred stocks usually have a call price, a buyback value set by their issuer that puts a potential cap on their price movement.
Preferred stocks have priority over common stockholders if a company is liquidated. However, preferred stockholders are not first in line during a liquidation event. Companies must pay off any debtors first.
Equities vs. stocks
When you consider equities versus stocks, it’s essential to keep in mind that one of the core differences is that all stocks are equities, but not all equities are stocks. Stocks are a type of equity, whereas equity refers to a broader range of ownership forms that includes stocks.
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How can you tell if it’s equity?
Because equity is a fairly broad category, there are many ways to define it. Equity refers to an ownership stake. That can mean owning an entire asset or just a small piece of it.
Where do equities trade?
Where equities trade depends on the type of equity:
- Private equities don’t trade on the open market. Instead, there are a few ways to exchange them. For instance, private companies could sell equities directly through a private placement. Another possibility is to purchase equities through an employee stock ownership plan (ESOP).
- Public equities such as common stocks are traded on a stock exchange. They might also be available in the over-the-counter (OTC) market, which is a network of brokers and dealers.
Who can buy equities?
Your ability to purchase equities depends on the type of equity:
- Private equities might only be accessed by specific individuals and companies. For example, an employee stock ownership plan (ESOP) offers employees exclusive access to a company’s equities. Private equities might also be available to private equity, venture capital companies, and private equity funds.
- Public equities such as common stocks could usually be purchased by anyone who accesses the stock market. You could use one of the best investment apps, a brokerage account you trust, or mutual funds to access this financial market.
What defines the price of equities?
The price of equities depends on their type:
- Private equities get their values by dividing the value of a company by the number of equities it has. Private companies don’t publish quarterly or annual reports, so the value of their equities might not be public.
- Public equities such as common stocks get their values from the supply and demand forces that act on the market via a stock exchange or other trading platforms.
Who regulates equities?
Private equities might be regulated by the SEC or FINRA.
How can you tell if it’s stock?
There are several ways to tell if a company has stock. One way is by searching the SEC’s electronic data gathering, analysis, and retrieval (EDGAR) database.
You could also find publicly traded stocks on exchanges such as the NASDAQ stock exchange or the New York Stock Exchange (NYSE). One easy way to tell if a company has publicly traded stocks is if you see it has a stock ticker, such as TSLA for Tesla or AAPL for Apple.
Where do stocks trade?
You could use one of the best brokerage accounts to trade stocks listed on stock exchanges, such as the NYSE or NASDAQ. Some stocks are also traded on secondary markets. These are known as over-the-counter stocks.
Who can buy stocks?
There are no specific restrictions on buying stocks. As long as you open a brokerage account or use an investment app, you should be able to buy stocks.
What defines the price of stocks?
Many factors determine the price of stocks. Generally speaking, stocks with higher demand than supply will increase in price, and vice versa. Stocks are more exposed to price volatility due to their public nature.
Many factors might influence the short-term demand and supply, such as the performance of relevant stocks in the market. Long-term forces such as changes within the company, political events, and market situations also play a role.
Who regulates stocks?
Stocks are regulated by the SEC.
What about shares?
Shares are how stock in a company is divided between investors. When you see a company’s stock price, you see the price to buy one share. This can also be referred to as its share price, and those who own stocks are often called shareholders.
Which are better, stocks or equities?
Stocks and equities are sometimes (but not always) different, but that doesn’t mean one is better than the other. They tend to serve different purposes for companies and investors. Which one is better depends on the type of investor or the company's needs.
When are equities called stocks?
Equities are usually called stocks when a company is publicly traded on a stock exchange, such as the NYSE. This allows anyone to purchase an ownership stake in the company.
Should I buy shares or stocks?
Buying shares and buying stocks are one and the same. When you invest in a publicly traded company or an exchange-traded fund (ETF), you do so by buying shares of stock in that company or fund.
The stocks you buy might decline in value. That’s why it’s important to have an investment strategy that includes a plan for weathering unfavorable market conditions, for example, through diversification.
On the other hand, you’d get closer to your investment objectives if your stock valuation increases. Earnings you make from stocks are called capital gains and are subject to taxes.
Taken together, equities and stocks make up the majority of investment in companies — both publicly traded and privately held.
All stocks are a type of equity because they grant an ownership stake in the company. However, equities don’t always refer to stocks because equity can take other forms, such as private equity.
Anyone could buy stock, but equity investment opportunities can be more restrictive. You could learn more about investing in stocks online or find out how to become an accredited investor to access the private equity market.
It often helps to build a solid investment plan before you get started. Receiving investment advice from a financial advisor might be what you need to put this plan together.
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