Equity (aka Stocks)

You’ve heard of the term “stock” possibly in the realm of food and cooking (i.e. chicken stock), but it means something completely different in the world of finance. Stocks, shares, and equities are terms used to describe a unit of ownership in a company. The terms are often used interchangeably in finance, but have some nuances to differentiate them. As a singular term, equity is more about the percentage of ownership, while a share or stock describes a single unit of ownership. As a plural term, shares are units of ownership in a specific company, while equities and stocks are units in multiple companies.

Here’s an example: if a company has 100 shares, and an individual was holding 10 shares, they could be said to have a 10% stake (equity) in the company.

When you buy or invest in stocks, you are purchasing in the hope that the company will grow, allowing your stock to be worth more when you decide to sell it. You may buy it for $10, watch it grow to $20, but you still own the same percentage (equity) as before. There are two main ways to look at the value of a stock or share: the fair value or the market value. The fair value looks at the company’s financial situation, while the market value looks at how much people are willing to pay for it. (Most of the time, you’ll be looking at the market value.) The market value is heavily influenced by how much demand there is for that company by the general public.

If you decide that getting involved with stocks is something you want to do, there’s a few things you’ll want to decide on your own:

1) Risk tolerance – how much are you willing to lose to gain a certain amount of money? Are you okay with making less money with a lower chance of losing money, or the other way around?

2) Trading type – What style of investment are you interested in? Do you see yourself participating on a daily basis, or do you want to hold and wait over the course of many years?

3) Hands-on involvement – How much do you want to control your financial destiny? Are you okay with having a manager or advisor deal with the details, or do you plan to be fully in control?

Equity and stocks are just one piece of the larger puzzle of finance; in the same way that shoe sizes and styles are varied, so are the types of ways that you can be involved in finance. We’ll be covering bonds and debt in our next article, so stay tuned!