I can understand how frightened people became when stock market investments were discussed. As a result, I wish to utilize this post to teach the basics of the subject. Let me first define the terms equity and stock before we get into investing or trading in the stock market.
Are stocks and equities the same thing?In the financial market, equity and stocks are frequently used interchangeably since both terms refer to ownership stakes in companies. These terms are not the same due to some technical distinctions. Whereas stocks or shares are tradable equity ownership of a company that can be issued (in the primary market) or sold (in the secondary market) to the public through Stock Exchanges, equity reflects a stake in a company, whether they are tradable or not.
Considering this, let’s examine the meanings of the two terms as well as their distinctions.
What is Equity?
Equity is a position of ownership in an asset or a stake in a company. As mentioned above, this ownership may be tradable or exchangeable in regulated markets (Stock Exchanges) or not. Equity typically denotes complete control of a company. Thus, if you hold, say, 10% of the equity in a company whose shares outstanding are 1,000,000 units, you owned 100,000 units of the company shares. Hence, entitled to 10% of the earnings or profit distribution from that company.
For the sake of this article, stock and shares will be assumed to mean the same thing. Though, financial experts believe there is a minor distinction between them.
A stock is a single share of ownership, whereas equity refers to ownership. Your equity increases as you purchase more stock. Simply put, a stock is an instrument you use to transact in company shares.
Stock is a form of tradeable equity that was developed to make the open market exchange of ownership value possible. This includes blue-chip stock, energy stock, value stock, large-cap or small-cap stock, etc.
Public Exchanges and occasionally Private offers are where the company’s stocks are exchanged.
When you purchase stock, you are purchasing equity in a firm from a seller who is transferring all or a portion of their ownership interest in the business. Conversely, when you sell stocks, you are giving someone who wants to purchase all or part of your ownership stake. Businesses typically issue one of two categories of stock: common and preferred stock
Common Stock (Common Shares)
This form of stock is the most prevalent, as its name would imply. Each share of common stock represents an equal percentage of ownership when the price of a stock is quoted as the price per share. Purchasing common stock entitles you to voting privileges and residual income rights for the company (you participate in both the share of the profits and losses of the company). However, you are shielded from any personal culpability when anything bad happens to the company or when the firm suffers losses that exceed the value of your stocks; in other words, you can’t lose more than what you own even if the company’s debts and liabilities exceed that.
Preferred stockholders typically receive a fixed dividend compared to common stockholders who receive dividends in accordance with the company dividend policy which is flexible. Additionally, you are given preference when it comes to getting paid first should a company go out of business. As they receive the least compensation when things go wrong, this indicates that common investors are the ones who incur the greatest risk. Preferred stockholders, however, are not allowed to vote or participate in corporate decision-making.
To be continued………