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You will hear a lot of people telling you about stocks, shares and equities. Frequently, these words are used interchangeably. But are there any difference between the three?
It turns out, there is.
A stock represents ownership of a company. For a business that only has one owner, like in the case of sole proprietorship, it can be said that the entire stock belongs to the business owner.
The stock can be divided into smaller stocks, which are now called shares. Think of each share as a part of the corporate pie.
Say that a company becomes a corporation, which is now owned by several people. Each of the owners, now called incorporators, will have a number of stocks that corresponds to the amount of capital put in to the enterprise.
Let us say, a company has 10 stocks, each worth a thousand for a total of P10,000 capital. Investor A invested P5,000. Investor B invested P3,000. Investor C invested P2,000.
Investor A gets five shares, investor B three and Investor C two.
Enterpreneurs do this so that the company can raise money, called capital. The capital can then be used to sustain operations and expand the business, such as putting up more branches and hiring more people.
You can also say, why not borrow money from the banks? That is also an option for business owners to raise capital. But at times, they prefer people who are willing to put up money and to directly participate in the business’ gains. In that way, they don’t have to pay interests which they would have to do if they borrow.
People who are part-owners of a company can be called a stockholder or shareholder.
An equity is the fractional portion of ownership of the company. Say that a company has ten stocks in total, and you own five shares. Then, it can be said that your equity, your ownership, is half of the whole company.
In managed funds, such as in the case of investment-linked policy, you will hear an Equities Fund. In its simplest form, it is fund that is a part-owner of several public companies. And that also explains why it is in plural ‘equities’; that means that it is invested in equity of multiple companies.