Listening to seasoned investors talk about the stock markets, easily using terms such as ‘equity’, ‘stock’, share’, and ‘security’, the average investor could start to feel just a little lost. But, rest assured, the terms are not as complex as they appear. The ensuing paragraphs will help unravel the meanings of these terms, their usage, and convergences and divergences
Equity
An equity share represents part ownership of the company. The term equity distinguishes it from a preference share. Equity is tradeable on the stock market. The sale of shares is subject to the share having been listed on a stock exchange. Equity is always unsecured and equity share holders are paid last in the event of liquidation of a company.
Stocks and Shares
When corporate entities were first established, they were referred to as joint stock companies. The ownership certificates issued were referred to as common stock to acknowledge the fact that they were held by the common people who had chosen to invest. But the individual investor owned only a part or a ‘share’ of the joint stock company. Gradually, these certificates came to be called ‘share certificates’ and the purchasers began to be called ‘share holders’. Basically, the common stock of the company is divided into shares that are held by individual share holders.
Stock is, thus, a collective noun for shares. When these shares began to be traded, the collective noun ‘stock’ gave birth to the term ‘stock market’; a place where all listed shares are traded. Of course, today, besides shares, diverse instruments are traded in the stock markets. And when a media report refers to ‘XYZ stock’ it includes all the equity shares of ‘XYZ’. Occasionally, an investor may say that he owns ‘stock’ intending to convey that he owns shares in more than one company.
Securities
The term securities would strictly speaking include equity but has a much wider connotation. Today, the usage generally refers to debentures, bonds, treasury bills, forwards, options, futures, and swaps.
A Bird’s Eye View
The contents of the table provide a bird’s eye view of the differences between equity, stock, share, and, security.
|
Feature |
Equity (Stock = more than one share of one company or more than one company) |
Security |
| Return | Dividend which is payable only if the company has surplus profits and is discretionary | Interest at the rate specified on the instrument. An obligation to be fulfilled by the issuer |
| Significance | Signifies ownership | Signifies a creditor – debtor relationship |
| Categorization | Capital | Debt |
| Impact | Determines the maximum borrowings that can be raised | Forms a part of the borrowings that are a function of equity |
| Voting rights | Can vote on all resolutions at general meetings | Can vote only on those resolution that affect their interests |
| Security | Unsecured | Could be either secured or unsecured |
| Risk | Maximum risk in case market price reduces after purchase | Low risk. Repayment of the principal is an obligation of the issuer |
| Market dynamics | Can be used for speculation | Derivatives especially can be used for either speculation or hedging risks |
