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The key difference between equity and shares is that equity represents the investor’s ownership in a company and shares are the portions of that equity ownership.
It is also possible that you hear the term ‘equity’ in various other fields for instance you buy a house worth Rs.20,00,000 but by taking a home loan of Rs.12,00,000. You can say that you own the house but in reality, your equity ownership in that house is 40% as you’ve paid only Rs.8,00,000 (Total Rs.20,00,000 – Loan of Rs.12,00,000) from your pocket.
But the term, ‘share’ (as security) you will only hear in the stock market and for the companies.
What is Equity?
You’ve read that equity means ownership in a company. But, how one can decide how much of the company’s ownership they own.
Ask yourself, ‘How can you become the owner of a company?’
I don’t know what your answer is, but mine is ‘by buying the shares of that company’.
It is that simple. You buy the shares of a company and become a shareholder of that company and it is the basic fact that a shareholder is the owner of a company.
Generally, we refer to the promoters as the owner of the company. But pay close attention to it that the promoters are also the shareholders of the company. We call them ‘owners’ for the same reason that is they own a major chunk of the shares.
For instance, if someone says he/she has a 10% equity stake in a company. Interpret it as that he/she owns 10% of the total outstanding shares of that company. If that company has 1,00,000 outstanding shares, that guy owns 10,000 shares.
Now, you’ve got the relation between the equity and shares. But, it doesn’t put a full stop to the concept of equity. There is more to it. Let’s have a look over another dimension of equity which is the equity formula:
The formula is saying that if you take all the assets of a company and reduce all the liabilities that the company has, whatever you left with is equity of that company.
If a company, for example, has Rs.10 crore worth of assets and the liability is nothing more than Rs.6 crore. The equity for that company will be Rs.4 crore (Rs.10 Cr – Rs.6 Cr).
Consider the guy with 10% equity has his stake in this company. 10% of Rs.4 crore (equity) which is Rs.40 lakh. 40 lakh is the amount that this guy with a 10% equity stake holds in the company.
To get ownership of a company, you must have shares of that company’s stock. A share is the single smallest denomination of a company’s stock i.e. a share is equal to a piece of the company’s ownership.
We have discussed earlier that to get equity, you need shares. And you can buy these shares (either equity shares or preference shares) easily by trading on the stock exchange but for that, you must have a Demat and trading account.
Equity | Shares |
Written as percentage (%) e.g., 10%, 20%, etc. | Share is a portion of the equity ownership |
Equity represents the ownership in a company | Written as numerals e.g., 5, 10, 100, etc. |
Equity does not have any categorisation | Shares are of two types: Equity shares and Preference shares |
The term 'equity' is used in other domains also | 'Shares' are only linked to corporate world |
Equity is much broader term than share | The terms 'share' is narrower than equity |
Conclusion
If you observe the terms, you will find no difference between equity and shares. Equity represents ownership in any company and to get that ownership you must have the shares of that company.
You can’t trade equity but shares are tradable, on the stock exchange, as a share is a portion of the equity measured in terms of number. And this refers that you can’t get the equity of any company directly, it must come indirectly to you in the form of shares.
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Knowledgeable, keep posting.
Thanks, Jeetu for your kind words.