Stock vs. Equity: Definitions, Differences, and Examples

By Indeed Editorial Team

Published November 28, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Investors can use stocks and equities to maximize returns in the long or short term, as each type of investment offers different risks and rewards. To evaluate which one is right for them, investors usually consider their risk tolerance, the instrument's reliability, and the financial information provided by the company or the exchange market. Learning more about the differences between equities and stocks can help you enhance your understanding of the stock market and assist a company in making better investment decisions.

In this article, we compare stock vs. equity, share the benefits of these two investment tools, and list various differences between stocks and equities.

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Comparing stock vs. equity

If you want to improve your proficiency in financial instruments and exchange markets, you may benefit from comparing stock vs. equity. Here are the definitions of these two investment tools:

What is a stock?

A stock is a financial instrument that provides its owner with a portion of a company's ownership. For instance, suppose that 10 stocks represent the total ownership of a company and that an investor owns one stock. This means that the investor owns 10% of the company's total ownership. Although investors buy stocks, they refer to them as shares, which is the term used to refer to a stock as a unit. Following the previous example, if the investor acquires three stocks, they might refer to them as three shares or 30% of the company.

Investors can buy stocks in primary and secondary markets. Primary markets comprise platforms where companies offer their shares to the public for the first time. Usually, private investors, chartered banks, hedge funds, governments, and institutional investors participate in the primary markets because they receive an invitation from the companies. Here, the businesses can launch an initial public offering (IPO) with a pre-established price for each share. Secondary markets are platforms where the public can exchange stocks they own for cash, contracts, or bonds. These markets typically have a higher volume of trading activity than the primary market.

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What is equity?

Equity refers to a company's total value minus its total debt. This means that to calculate equity value, it's necessary to estimate all the company's assets, including shares, cash, lands, buildings, patents, trademarks, equipment, and inventory. Then, you can calculate the company's total liabilities and debt, which might comprise loans, accounts payable, salaries and wages, and accrued liabilities. Usually, you can find the company's equity value in its financial statements and balance sheets, as this information represents its total value. A company's equity can affect the value of its shares and its ability to ask for loans.

A positive equity value means that if the company were to liquidate its assets, the shareholders might receive a certain amount of cash for them. A negative equity value means that the owners might lose some of their assets or might even face obligations to pay back some of the company's debts. Equities cannot fluctuate in value because they vary based on the company's ability to get more assets, expand its business, and pay off its debts. Although this value can affect a company's share price, stocks can fluctuate due to expectations, rumours, demand, and supply.

Related: Equity vs. Assets (What They Are and How They Are Different)

Benefits of stocks and equities

Because their price can fluctuate quickly, stocks can help investors gain profits faster than other investments, such as bonds. They can make these profits by holding the stocks for a short period, waiting for them to appreciate, and then selling them for a profit. Investors can also make profits when the stocks are decreasing in value. To do this, investors can sell stocks at a higher price, wait for the stocks to decrease in value, and then buy them at a lower price and give them to the buyer.

Equities can provide investors with a more sound investment, as there's no exchange market to affect their value. Because companies usually show their financial status and statements, investors can evaluate them and see whether they're reliable and profitable. They can also assess if the company can expand its business, expand its inventory, acquire a smaller organization, or merge with a bigger one. This information can help them predict their profits in the long term.

Related: Stock Investment Dividend Yield Pros and Cons with a Formula

Other differences between stocks and equities

Here are the most relevant differences between stocks and equities:

Where do investors buy or exchange stocks and equities?

Investors can buy stocks and other securities, such as bonds, options, and futures, in exchange markets. These markets can comprise local exchanges, national markets, or international ones, which means companies can sell their shares to a variety of investors in different provinces and countries. Some of these exchange platforms open and close at a certain hour, and others remain open every day. Usually, exchange markets follow an index that represents their financial health and offers information about the trading volume. An index groups the most important and reliable assets in the market and tracks their performance.

To buy equities, it's necessary for investors to negotiate directly with the company and its board of directors. They can present an offer during a board meeting or allow the company owners who want to sell their ownership to expose the reasons before the board. When investors acquire equities, it's crucial for them to inform their provincial, territorial, and federal governments, as these instruments involve a series of legal responsibilities and tax regulations. Company owners usually have the right to make the first offer for a partner's equities if they want to sell.

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Where can investors see the price of stocks and equities?

Investors can see a company's balance sheet to determine the official price of its equity, but they can also research the company's cash flow statement to evaluate future earnings potential. Usually, investors investigate the company to assess their loans' terms, interest rates, payment history, quality of the collateral, and potential default risks before making any offers. They can also assess assets' current conditions, operations, inventory, suppliers, and customer base. This information can help investors determine the real price of a company's equity and negotiate with its owners for a potential investment.

To determine a stock price, it's necessary for investors to check an exchange market and review different time frames. If they're looking for a long-term investment, they can review weekly, monthly, and quarterly time frames. Conversely, if they're looking for short-term profits, they can check daily time frames. This data can provide them with details on how the price of a stock has changed over time and research the potential causes. If the investor decides to buy the stock, the price they pay at the moment of purchase is the market price.

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What factors might affect the price of stocks and equities?

There are different factors that can affect a company's equity, including interest rates, dividends, loans, capital gains, taxes, and overall economic health. If federal financial institutions decide to raise interest rates, the company's debts might increase, reducing the value of its equity. In addition, if the provincial economy is strong, the company might increase sales, revenues, and profits, which can allow it to acquire more valuable assets, increasing the value of its equity.

Stock prices can change depending on a company's performance, international agreements between two countries, or political and economic conditions. For instance, if a country denies the use of certain types of smartphones within its borders, the companies that manufacture these smartphones may lose market share and lose value in the stock market. In addition, if a company signs an agreement with a local government to provide telecommunication services within public spaces, the company's stock price may increase.

Related: Technical Analysis vs. Fundamental Analysis (Definitions)

What are the types of stocks and equities?

There are two types of stocks, including common and preferred stocks. Common stocks allow investors to select auditing firms, help change or maintain corporate governance, determine dividend policy, and grant them voting rights in the company. Preferred stocks provide investors with the right to claim dividends from the company's operations and investments. These instruments grant them preference over common stockholders if the company liquidates its assets.

There are also two types of equities, including stockholders' equity and owners' equity. Stockholders' equity refers to the portion of the company's assets that it can distribute among its shareholders after liquidating its assets and paying off its liabilities. Owners' equity usually applies to small businesses and refers to the portion an owner has in the company. They can estimate it by calculating how much cash they can obtain after selling all the assets and subtracting the liabilities from the cash.

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