Letโs start with the basics of basics first. Stocks and equities are one of the same. At the same time, both are shares of a certain entity, in the majority of cases, weโre talking about market-listed tradable companies.
Are you following us so far? You better be. After all, the line dividing these terms is thin as ice in Baikal Lake when summer turns around. If youโre looking at the issue from a stock market viewpoint, stocks are genuinely a companyโs equity shares that are sold on the open market.
At the same time, when youโre looking at them from the companyโs side, and the whole corporate world, equity is the essence of ownership. The moment a company is listed on a stock exchange its equity becomes stocks.
Basically, we are talking about one term, but in different positions in terms of its ownership, trading position, and general context. Letโs talk about equity first.
Equity
The more you delve into this subject, the clearer things become. At its base, equity is the value a company possesses. But, not so fast. It only stands if all of its liabilities are paid off. When you look at it, it is the companyโs net worth.
Counting its base value is not hard. Equity as its name suggests equals the total value of all assets minus outside liabilities. The latter are all debts that the company acquired during its existence short or long-term.
If you donโt want to look at it from the debt perspective you can see it like this: Equity equals its entire share capital plus reserve and surplus. In essence, both equations are quite simple, and after a while, you shouldnโt have any issues understanding them.
Stocks
Moving on, we are at the stockโs doorsteps. Stocks are what’s seen as a companyโs capital. It comes to value after the company lists its shares on a designated stock exchange.
It functions on a simple principle โ investors recognize value and buy shares of a certain company and become part-owners through their initial investment. The shares they buy represent equity.
Consequently, they are traded on the designated stock exchange as stocks. Before being listed on the stock exchange the company creates an estimation of their value to be able to determine the value of each stock.
Once you develop an interest in stocks, youโll quickly learn that there exist two types โ common stock as the first option and preferred stock as the second option. For those more adept in the terminology of this field also know them as equity shares and preference shares.
Both will give the investors ownership but under different terms. Letโs see how they fare on the market, but before we do that you can click here, and check out how stock charts function.
It all starts with their name. holders who want certain preferences seek preferred stocks. For most investors, it is about a set dividend that will put them above the average stakeholder, in the case that the company makes a profit.
In a case of misfortune where a company goes out of business, but there is money left to pay out the stakeholders, those who hold the preferred shares will receive their payout first. While these stocks hold more value than the common stocks they still do not provide their owners any part in the companyโs decision-making processes or any form of participating in voting to board decisions.
The Thin Line Explained – Stocks vs. Equities
While similar in many ways, the line that separates them exists. It’s a thin one, but once you get a grasp of the essence the dilemma of stock vs. equities will stop existing for you. The next part of the article will be dedicated to explaining the differences between stocks and equities.
We’ll start with their position on the stock market. As far as the exchange goes stocks are defined as those equities that are tradable and are available for exchange on the stock market. At the same time, equities are not tradable and are not available on the stock exchange.
Moving on, we have their presence in the public domain. The stocks trading involves public participation while the same rules do not apply to equities that are not susceptible to public involvement. This part of the equation is tied greatly to their value and cost.
Being on the public market stocks vary in price and value daily as they are part of the market that operates based on demand and supply. At the same time, equities are not on the open market so their price remains unchanged regardless of the market fluctuations.
Value is where things get more interesting. The company is valued on both the price of its stocks and equities. But, that price varies. In terms of stocks, a company’s valuation comes from the number of stocks multiplied by their price and you get its fair market value.
Equities, at the same time, represent the book value of the firm when you multiply its number by the face value they possess.
The paragraph above is the sole reason why the stocks are not found on the company’s balance sheet while equities are a vital part of it. Furthermore, it also gives them face value when a company merger or acquisition happens.
When this happens, the value of the company gets increased or lowered based on the value of its stocks. Equities, while valuable, are not taken into consideration during any of these processes.
Last but not least, part of their differences is tied to the stock exchange and their listing on this institution. Equities turn into stocks the moment they are listed on any stock exchange.
This is the first time that the term stocks get to be used in terms of equities. Equities hold their value as a part of the company’s estimation even without being listed.
Bottom Line
This article is proof that the difference between stock, shares, and equities is a thin one but that still exists. The good news is that once you get a grasp of their whole surroundings and the corporative terms used things get much clearer. We can only hope that we were one of the beacons that lighted the way for you in this department.
