Equity and shares are concepts that are frequently used when discussing how business operations are financed. The two terms equity and shares are closely related to each other in that they both represent capital or ownership stake held in a company or in an asset. Due to their major similarities they are often misunderstood to be the same. The article that follows clears this misunderstanding by explaining the meaning of each term and showing how equity and shares are similar and different to one another.
Equity
Equity is a form of ownership in the firm and equity holders are known as the ‘owners’ of the firm and its assets. In simpler terms, equity is a form of capital that is invested into a business, or an asset that represents the ownership held in a business. Equity also refers to the value of the ownership that is held in an asset. Any company at its stage of start-up requires some form of capital or equity to begin business operations. Equity is commonly obtained by small organizations through the owner’s contributions, and by larger organisations through the issue of shares.
In a company balance sheet, the capital contributed by the owner and shares held by a shareholder represent equity as it shows an ownership held in the company by others. Once shares are purchased by an investor, they become a shareholder in the firm and hold an ownership interest. Equity may act as a safety buffer for a firm and a firm should hold enough equity to cover its debt. Equity can also refer to the value of the capital held in assets such as the value of a home. For example, if the market value of your house is $H and you owe $M in the amount to be paid as mortgage the equity in your house will be calculated as $H-$M.
Shares
Shares are parts of capital investments made by an investor in a publicly traded firm. The investor who purchases shares are known as a shareholder and is entitled to receive dividend, voting rights and capital gains depending on the type of shareholding and the performance of the company and its shares in the stock market. Stocks and shares refer to the same instrument and these financial assets are usually traded on organized stock exchanges around the world such the New York Stock Exchange, the London Stock Exchange, The Tokyo Stock Exchange, etc.
There are 2 types of shares known as ordinary shares and preference shares. Ordinary shares carry voting rights with higher control given to shareholders in business decisions. However, unlike the preference shareholders, ordinary shareholders are not always entitled to receive dividend, and dividend may only be received when the business performs well.
What is the difference between Equity and Shares?
Equity and shares are terms that are closely related to one another and represent an ownership interest held. Equity can refer to, either the ownership interest that is held by shareholders in a firm, or the equity held in an asset such as a property, building, or house. Shares are the parts of the company’s capital (or ownership) that are sold to the general public. The best way to explain the difference between the two is to illustrate an example. Say that you purchase 100 shares worth of $10 per share at a total of $1000. This $1000 is the equity that is held in those 100 shares. In case the company faces bankruptcy the stock held will not be worth anything, so the shareholder will still hold 100 shares but with a value of zero equity since now that the company has faced bankruptcy there is no value in the shares held.
Summary:
Equity vs Shares
• Equity and shares are concepts that are frequently used when discussing how business operations are financed.
• Equity is a form of ownership in the firm and equity holders are known as the ‘owners’ of the firm and its assets. Equity also refers to the value of the ownership that is held in an asset.
• Shares are parts of capital investments made by an investor in a publicly traded firm.