For many beginning investors, tackling the terminology of the financial market can be daunting. Terms like stocks, shares, and equities are everywhere, but what do they really mean?
Stock is a general term used to indicate a partial ownership in a publicly traded company. When you buy stock, you are investing in a company and are entitled to a share of the profits. How much stock you own in any one company is determined by how many shares you hold. If you purchase shares, you own stock.
Shares refer to the amount of stock you own in any one company. If you buy say 50 shares in company XYZ, you are a shareholder with 50 shares. If you buy 1 share, you are a shareholder with 1 share. You own stock in the company regardless of how many shares make up that stock.
Equities are sometimes referred to in the same way as stocks, and many investors use the terms interchangeably. For example, you might hear someone say they own equities in a company when they are referring to stock (or shares). Other times equity refers to a type of ownership in a company that is not publicly traded (and therefore does not issue stock). In these cases equity refers to the portion of the company owned. In other words, if you invest directly in a company, as say a partner, you own equity in that company.
Owning stock (one or more shares) means that, if the company is profitable, you have equity in that company. Having equity in a company, however, does not mean you have to own stock. You may also hear the stock market referred to as the equity market and stocks as equity instruments. The main thing to remember is that equity is basically the net value of something. So if you have more money than you owe, you have equity. This applies to stock as well. If the company is profitable, they will have equity, and if you own shares, you own a portion of that equity.
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