Equities vs. Stocks (Which is Better in 2019?)
Today’s article examines the differences between equities vs. stocks.
They are almost the same thing, so we’ll mostly be dealing with semantics. Nevertheless, having this kind of basic information is important to know as part of a comprehensive education.
Equity investment means ownership in a company. You buy equity when the stock trades at a certain valuation hoping the valuation will increase and your ownership position will become more valuable.
In previous articles, I’ve mentioned that a share of stock represents a small ownership piece of a business.
Let me back and fill a little bit. Most publicly traded businesses are organized as corporations, which issues a certain number of shares of common stock, with each share representing an equal ownership percentage, or equal equity percentage.
If you buy shares of common stock, you participate in both profits and losses of that corporation, you get to vote at the annual meeting, but are also not held personally liable for anything bad that happens at the company. That what happens when you own an equity position.
Equity thus is a catch-all term for ownership. Stock is tradable equity.
What are equities?
As mentioned, equities are ownership positions in an asset, usually a company. If you have 20% equity in a business, you own 20% of that company, and get 20% of its profits.
You’ve probably heard the term “home equity”, and that you need to pay a 20% down payment on a mortgage to buy a home.
The bank is telling you that you must buy 20% equity in that home – an ownership position – before it will let you borrow money to purchase the other 80% of that equity. Even then, the bank technically owns that other 80% because you owe it money.
Over time, you build equity – ownership – by paying off the loan principal.
In the stock market, the more stock you buy, the more ownership you have in the company.
What are stocks?
When you purchase stock, you are purchasing equity in a company from someone who wants to sell it. When you sell stock, you are selling that equity to another buyer.
Stock is a vehicle with which you can engage in transactions of company equity. It is a tradable form of equity, created to facilitate the exchange of value in an open market.
The reason tradable equity was invented is because different people believe different things about the present and future value of a given company. Stock allows them to trade with each other based upon those differing opinions (and goals).
What are the differences between equities and stocks?
When it comes to equities vs. stock, here’s the rule: Not all equity has tradable stock, but all tradable stock involves equity.
Equity exists in every business ventures, every piece of real estate, every house – anything where value can be split among owners. This is true not only of corporations, but of partnership and proprietorships.
However, not every equity venture has stock that is tradable. A corporation that has no or limited members issues a fixed set number of shares that are not even permitted to be traded.
Stock is either thus tradable or not. If it is tradable, then equity in a venture can be bought and sold.
Advantages of Stocks
When comparing equities vs. stocks, here are the advantages of stocks:
- You can buy or sell short
- Dividend payments
Here’s a video that provides some basic information on investing in stocks.
Stock is tradable, if it is registered with the SEC. There must be specific facts provided in that registration statement, including “A description of the company’s properties and business; A description of the security to be offered for sale; Information about the management of the company; and Financial statements certified by independent accountants”, according to the SEC.
After being registered, that stock can be traded. Sometimes it will be traded on large public exchanges, and sometimes in private offerings.
Buy or sell short
Most people think that one can only buy and sell stock. Generally, people choose to buy stock and hold it because stocks historically go up over the long term.
However, there’s another way to trade stock called “short-selling”. An investor borrows shares from a brokerage and then sells them, hoping the stock will fall. When the investor decides it has fallen far enough, he then will buy back those borrowed shares that he sold, and return them to the brokerage.
Thus, with tradable stock, an investor can bet that a company’s value will go up or go down, and play both sides of the market.
One of the top advantages in regards to equities vs. stocks is that many legacy stocks provide regular dividend payments to shareholders.
If a company’s cash flow is robust, and uses only enough cash to pay expenses, to grow, to pay into to employee pensions and so on, it might still have money left over.
Some companies then give that money to shareholders as a bonus for taking the risk of investing with them.
Advantages of equities
As far as equities vs. stocks, these are some advantages to consider regarding equity:
- Share in the tangible profits
- Not personally liable
- Less complex than debt
Here’s a video that explains what equity is and what it isn’t.
Share in profits
By owning equity in some security, corporation, or asset, your ownership grants you the right to collect a specific share of the profits of that security or other item.
Now, whether or not you actually get paid those profits or they get reinvested into the business, or used for some other corporate purpose, will be determined by a board of directors and/or majority shareholders.
So unless you wield great influence in the company, you may very well be entitled to share in the profits, but those profits may not be available for you.
Not personally liable
As a common equity holder in a company, you are generally insulated from personal liability if something untoward happens involving the company. So if the board of directors is corrupt or the books are cooked, a common equity holder is not going to be held personally accountable.
That doesn’t mean that the value of the equity won’t fall. It probably will. But at least you won’t be on the hook for money or jail time.
When it comes to equity ownership in a company, it’s much less complicated than if one is a holder of debt or bonds. You share in the profits or losses, you put up capital if needed, get dividend payments, and vote on company matters. That’s it.
With debt, things are far more complicated. There are often multiple tranches of debt, each with different rules, different ways to recoup principal if the company falls on hard times, and different rights that must be defended in battle with other debt holders.