Equity refers to the ownership of an asset (Also see Understanding Asset Conversion Cycle) or a business. In the case of a business, equity means that one has the ownership right in that company. Equity cannot be traded freely in the open market. Contrarily, shares are the part of the equity that can be measured by using values, numbers or percentage. One will be able to trade the shares easily in the stock exchanges.
Generally, equity stands for the ownership stake that one has in a company. In simple words, it means the net worth or ownership capital after settling all the liabilities. Most people buy equity investments as they expect to get the chance to enjoy the appreciation in value. On the other hand, shares refer to the units of the company’s capital that people can trade freely on the stock exchange. To obtain the ownership of the company, one has to buy its shares. The holding of shares will influence the portion of the equity that a person is holding directly or indirectly.
Differentiating equity and shares (Also see An Overview of Common Shares) is crucial as this helps you to understand the issues relevant to ownerships so that you know exactly what you are holding. Also, even if you outsource your accounting tasks to an accounting firm in Johor Bahru because you do not know much about accounting, you still need to understand the financial statements that the accountants have prepared for you so that you can have a tight grip on the financials of your business.
We can have a look at some examples to understand better the concepts of equity and shares. As an instance, Jane has bought a car worth RM250,000, and she has taken a loan of RM200,000. Thus, in this case, the equity that Lucy holds is RM50,000. The second example is the purchase of shares. As an instance, Peter bought 15% of the shares of XYZ Corporation. Hence, we can say that Peter has an ownership stake of 15% in that company.
It is now clear that equity and shares are different from each other. There are some other significant dissimilarities between them too. As we have mentioned just now, one would not be able to trade equity in the market, yet shares (Also see What is Share Certificate?) can be traded easily on the stock exchange. It is normal to see equity in almost all kinds of business, such as sole proprietorships, partnerships, companies and so on. As against, we will see shares only in companies normally.
If we compare the levels of risks associated with equity and shares, equity will be the one that has a higher level of risks as it is regarded as the ownership someone has on a business. Thus, the equity holders need to handle the complexities that the business is facing. Contrarily, the risks level associated with shares is lower because the investors will only lose the capital they purchased and owned in the worst-case scenario.
In conclusion, “equity” is a broader term than the term “share”. All shares fall under the category of equity, which means that shares are a subset of equity. The components of equity include reserves, stocks, shares, and other funds, while shares are part of the company’s equity. Hence, knowing their differences is crucial and companies should plan for the utilisation of equity wisely.