Macro Monday: Stock vs. Equity?
Welcome to Macro Mondays! Let's do something really basic and take a look at the difference between stocks and equity. Generally, the lay person will understand what a stock is but very often I will write about "equities" and this tends to confuse people. No more confusion - here you go!
What is a Stock?
A "stock" is a type of security that signifies ownership in a corporation and represents a claim to a portion of the corporation's assets and earnings. This means if you own one share of McDonald's (MCD) you own a piece of the company itself. However, keep in mind that there are close to one billion shares of MCD out there, so despite your ownership, you really have no real power.
There are two types of stock: common and preferred. Common usually entitles the owner to a vote at shareholders' meetings and entitles them to a dividend payment. Preferred generally does not have voting rights, but in turn has a higher claim to assets and earnings - for instance, they will receive dividend payments ahead of common shareholders and they will have priority to the company's assets should it ever go bankrupt or liquidate. Common shareholders will get whatever is left over.
What is Equity?
On the other side, "equity" is used more in the accounting sense in that it is the value of an asset less the value of all liabilities on that asset. Generally speaking, the definition of equity can be represented with the accounting equation:
Equity = Assets - Liabilities
However, because of the variety of types of assets that exist, this simple definition can have somewhat different meanings when referring to different kinds of assets. A "stock" (or any security representing ownership of the company) is just one form of equity. Funds contributed by the owners (the stockholders) plus all of the retained earnings/losses are considered to be "shareholders' equity". In the context of real estate, the difference between the current fair market value of the property and the amount the owner still owes on the mortgage.