Are Stocks and Equities the Same Thing?

Many individuals often use “stocks” and “equity” interchangeably, leading to confusion. While closely related, these terms represent distinct concepts. Understanding their relationship is important for navigating investments or understanding company financial health. This article clarifies the differences and connections between these financial terms.

The Relationship Between Stocks and Equity

A stock, or share, represents a unit of ownership in a company. When an investor buys a stock, they acquire a fractional portion of that company. This means an investor owns a percentage of the company based on shares held relative to the total shares issued.

Equity broadly signifies ownership value in an asset or company. For a business, equity is the value remaining for owners after all liabilities are accounted for. Stocks are a specific, tradable form of a company’s total ownership. Therefore, all stocks are equity, but not all forms of equity are individual stocks.

Understanding Stocks

Holding a stock means an investor possesses a claim on a company’s earnings and assets. This ownership provides potential benefits, including capital appreciation from market price increases. Investors might also receive dividend payments, which are distributions of company profits to shareholders.

There are two primary types of stock: common stock and preferred stock. Common stock typically grants voting rights to shareholders on corporate matters, like electing directors. Holders of common stock receive dividends, but these payments are not guaranteed and are distributed after preferred stockholders.

Preferred stock generally does not carry voting rights but offers fixed dividend payments paid before common stock dividends. In a company’s liquidation, preferred stockholders have a higher priority claim on assets than common stockholders. Stocks are actively bought and sold on public exchanges, such as the New York Stock Exchange (NYSE) and Nasdaq, serving as a primary investment vehicle for growth and income.

The Broader Scope of Equity

Beyond individual shares, “equity” encompasses a broader concept of ownership and net worth. “Shareholder equity,” also known as “owner’s equity” or “stockholders’ equity,” is a section on a company’s balance sheet. It represents the residual value of a company’s assets once its liabilities have been subtracted, adhering to the accounting equation: Assets = Liabilities + Equity. This figure indicates the amount theoretically returned to shareholders if all company assets were liquidated and all debts paid.

Companies also use “equity financing” to raise capital for operations or expansion. This involves selling ownership stakes, often as shares, to investors for cash. Unlike debt financing, equity financing does not create a repayment obligation. The term “equity” also extends to other contexts, such as private equity (ownership in non-publicly traded companies) or home equity (the portion of a property’s value owned outright). These applications highlight that equity broadly refers to an ownership interest and its value.