Equities vs. Stocks: They aren’t the Same (And Here Is Why)

Many people use the terms “stocks” and “equities” interchangeably, but they aren’t exactly the same thing. Both terms refer to an ownership stake in a company, but their definitions can vary depending on context.

Stocks are shares you can buy in a company, while equity generally refers to the level of ownership. Let’s get into the details and break down the similarities and differences between equities and stocks to understand their potential placement in your portfolio.

Equities vs. stocks

Stocks are a type of security, or investment, that can be bought and sold. They represent partial ownership of a company. Each unit of ownership is called a share. You own stock in a company when you own a share, whether it’s one share or one million shares.

Equity refers to the stake, or proportion of ownership. If you own one share out of a total of 10 shares, you have 10% equity in the company. If you own one share of stock out of 10,000 total shares, you have 0.01% equity in the company.

All stocks are equities, because they all represent ownership. However, there are several kinds of equity, so not all equities are stocks.

Here’s a quick breakdown of equities vs. stocks:

What are stocks?

Stocks are a way for companies to raise capital to grow their business. By selling shares of stock, a company can expand production or pay back debt. In exchange for helping a company raise capital, people who buy the stocks — the shareholders — get an ownership stake in the company.

The first time a company offers its stock to the public is called an initial public offering (IPO). Its shares are listed on a stock exchange, where traders and investors can buy and sell them. When demand is high and supply is low, the price of each share goes up. If demand drops and there are more shares than buyers, prices fall.

There are two main types of stock:

• Common stock
• Preferred stock

Let’s go over each type.

Common stock

The majority of stock that a publicly traded company issues is common stock. This type of stock gives the owner partial ownership of the company as well as its profits, paid out in the form of dividends. When you hear about various stock prices in the news or on TV, they’re usually referring to the price of the company’s common stock. When you invest money in a publicly traded company, you’re usually buying shares of common stock.

Preferred stock

Preferred stocks give their owner priority when receiving dividends, and the dividends may be higher than what you receive with common stock. Preferred stock owners are also paid out before common stockholders (but after creditors) if the company is liquidated. However, preferred stocks usually don’t grant voting rights, while common stocks do.

The price of preferred stock can rise and fall with supply and demand, but it’s usually not as volatile as with common stock. That’s because preferred stocks usually have a call price, which is a buyback value set by their issuer that puts a potential cap on price movement.

What are equities?

The definition of equities is not always clear-cut and might depend on language and local variations. In general, equity refers to an ownership share, and equities are ownership shares of a company.

The term “equity” can also be used more broadly to describe ownership. Here’s how I remember it: when I make payments on my mortgage, I’m building equity in my home. Each payment gets me closer to 100% ownership. It’s the same with owning stock: the more stock you own in a company, the more equity you have.

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.

Two of the most common forms of equity are:

• Private equity
• Public equity

Let’s break it down.

Private equity

Private equity is the partial ownership of a company that is privately owned, not traded on a public stock exchange. Private equity investors have ownership stakes in the companies they own equities in.

When an investor holds a large ownership stake – 50% or more – it’s called a majority stake. Private equity firms often hold such large stakes in companies as a way to invest, typically with an eye toward selling the company later for a profit.

Public equity

Public equity, also known as shareholders’ equity, refers to the partial ownership of a public company. This type of equity divides a company into shares that can be traded on the stock market by anyone.

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.

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.

How can you tell if it’s equity?

Because equity is a fairly broad category, there are many ways to define it. To identify equities, you may have to dig a little deeper.

Where equities are traded

There are two main ways of trading equities:

• The open market: 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.
• Private sale: 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).

Who can buy equities

Your ability to purchase equities depends on the type of equity.

• Anyone can purchase: Public equities such as common stocks can usually be purchased by anyone with access to the stock market. You can buy them with one of the best investment apps or a brokerage account you trust. Mutual funds also buy public equities, and then make shares of the fund available for purchase.
• Exclusive access only: Private equities might only be accessed by specific individuals and companies. For example, if you’re an employee of a company, you may be able to buy private equities through an ESOP. Private equities might also be available to private equity firms, private equity funds, and venture capital companies.

How equities are priced

The price of equities depends on their type:

• Private valuations: 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.
• Market forces: 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. Broadly speaking, more demand drives the price up, and more supply drives the price down.

How they’re regulated

Private equities may be regulated by the SEC or by FINRA, the Financial Industry Regulatory Authority. Public equities are regulated by the SEC.

How can you tell if it’s stock?

There are several ways to tell whether a company has stock. One way is by searching the SEC’s electronic data gathering, analysis, and retrieval (EDGAR) database.

You can 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 stocks are traded

You can buy and sell stocks 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, as long as you have the funds to purchase them.

How stocks are priced

Many factors determine the price of stocks. Generally speaking, stocks with higher demand than supply will increase in price, and vice versa. Stocks experience more price volatility due to their public nature.

Many factors might influence the short-term demand and supply, such as overnight news or a company’s quarterly performance. Long-term forces such as changes within the company, political events, and market situations also play a role, as does investor sentiment and the economy at large.

How they’re regulated

Stocks are regulated by the SEC.

FAQs

Bottom line

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 can buy stock, but equity investment opportunities can be more restrictive. You can 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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