The Difference Between Equity & Stocks
Stock represents ownership of a specific company, while equity refers primarily to value. It could be the value of the stock itself, the value of a company as a whole or the value of your home. Financial terms can be confusing, and when the word "equity" is used interchangeably with the word "stock," the actual difference between these two terms becomes obscured.
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What Is Stock?
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If you own a share of stock, you own a proportional part of that company. For example, owning 100 shares of Microsoft Corporation gives you ownership of a portion of that corporation. As an owner, you have the right to share in its profits (or losses), either through a rising stock price, the distribution of dividends or both. Ownership also gives you voting rights, which can influence the decisions a company makes, such as who sits on its board of directors.
What Is Equity?
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Equity represents the value, over and above any claims, debts or liens against it, of an object of value. You understand this definition if you have ever applied for a home equity loan. Such a loan allows you to borrow against the value (equity) of your home after your mortgage has been taken into account.
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Similarities
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The stock you own actually represents equity, or value, in a specific company. Your broker will refer to your stock holdings (but not your bonds, which are debts owed to you) as your equities. Companies also refer to their outstanding shares as equity; the value of all the outstanding shares represents the total equity of a company.
Differences
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Differences matter. To clarify the difference between the two terms, suppose that you have ten shares of a stock worth $100 per share, giving you $1000 of equity in that stock. Now imagine that the company goes bankrupt, and your stock becomes worthless. You now own ten shares of stock, but you no longer have any equity. Paradoxically, you can own equities and have no equity.
Uses
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If you have equity in your stock you can borrow against it, just as you might borrow against the equity in your home (for taxable brokerage accounts only; the IRS does not allow margin borrowing in IRAs). When you use your borrowed money to purchase more stocks, you can potentially magnify your returns. However, as many homeowners discovered when the housing bubble burst, equity can fluctuate, and borrowing against it can potentially magnify your losses.
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References
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