The words “equity” and “stock” are often bandied about as though they’re interchangeable terms to describe the same thing. But, while there are many similarities, there are also some key differences between equities and stocks. We summarise what those differences are, and how to approach investing in each.
What is equity?
Equity refers to an ownership stake in a company. In other words, how much of a company you own.
Let’s say, for example, a company has 5,000 shares, and you own 1,000 of them. This would mean you hold 20% of that company’s equity.
There are two main types of equity: public equity, and private equity.
- Public equity refers to the shares in a company that can be traded on a public exchange, such as the London Stock Exchange.
- Private equity is shares in a company that can’t be traded on a public exchange. This type of equity can be bought or sold privately, or even given away, but it’s not available to just anyone. For example, employees of a business might be given a share of the private equity in their company.
What are stocks?
Stocks refers to a portion of ownership in a company. Usually when you say you own stock, it’s a fairly generic term rather than a specific amount – you’d simply say you own stock in Amazon, or Tesco, for example. If you felt inclined to get into the nitty gritty of how much you owned, you might instead talk about how many shares (individual units of ownership) you held.
Are equities and stocks the same thing?
Given the definitions above, you might be forgiven for assuming that stocks and equity are exactly the same thing. And indeed, the terms are often used interchangeably.
There are many similarities. Both represent an ownership stake in a company. And, in both cases, the value of that stake will rise when the company does well and fall when it performs badly.
But there is a subtle difference. Whereas equity can be either public or private, stocks are always public, as they can be traded on public stock exchanges. So when you hear about equity being traded on a stock exchange, it’s almost certainly specifically referring to public equity.
Basically, all stocks are equities, but not all equities are stocks.
How can I buy stocks?
Stocks are traded on a stock exchange, such as the London Stock Exchange, or the Nasdaq in the US. To buy and sell, you’ll need to open a share dealing account, with a traditional broker or an online share dealing platform.
How can I buy equities?
Public equity is a type of share in a company that can be bought and sold on a stock exchange. Stocks and public equity are effectively the same thing, and the terms are often used interchangeably.
Private equity is a different matter. This type of share in a company isn’t traded on a stock exchange. While there are professional firms that specialise in investing in private equity – known (unsurprisingly) as private equity firms, or sometimes venture capital firms, access isn’t as straightforward as it is with stocks for the likes of you and me (individual, non-professional investors).
However, there are a few ways in which UK investors might be able to invest in a share of a private company.
How can I invest in private equity in the UK?
- Through employee share schemes. Employees of a company might be offered some equity in the company they work for as part of their employment benefits. This might involve the gifting of shares, or the future right to buy shares at a fixed price.
- Indirectly, through private equity ETFs. Such ETFs track an index of publicly-listed private equity companies. With this option, you don’t directly own a share in the private companies. Instead, your money is pooled with other investors to give you exposure to the performance of the private equity firms that invest directly in private equity.
- Through EIS and SEIS funds. The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) were set up to encourage individual investors to invest in companies and social enterprises that are not listed on any recognised stock exchange. With EIS and SEIS funds, investors’ money is pooled to buy shares in around 5 to 10 start-up companies, with each investor receiving stock in these companies. Companies must have traded between 2 and a maximum of 7 years. Investors who hold their shares for at least 3 years may be eligible for certain investment tax reliefs.
- Through venture capital trust (VCT) funds. Venture capital trusts were introduced in 1995 to incentivise investment in small businesses. Shares in VCT funds are traded on a stock exchange. They typically invest in around 20-30 companies. Investors own a share of the fund, not of the underlying companies, so they are slightly different to EIS and SEIS funds. As with the EIS and SEIS schemes, investors may be eligible for certain tax reliefs.
- Through crowdfunding. Crowdfunding platforms such as Crowd for Angels allow individual investors to invest directly in small companies and support them to grow. Crowdfunding lets a large number of people to invest relatively small amounts of money in a brand new company. Companies that have got off the ground through crowdfunding include fitness brand Peloton, and shoe retailer Allbirds. If you’re tempted to take part in crowdfunding, check what you’ll get in return for your investment. While some companies offer equity in the business, others request loans (or bonds) that they must repay. You may also get freebies or discounts on the company’s products or services (indeed, with some types of crowdfunding, this may be all you get).
Investors should be aware that private equity, particularly if bought directly, can be high-risk. Companies that aren’t listed on an official stock exchange are often smaller and less well-established. This means there is a higher than average risk that they will fail, and you could lose money.
Are there any tax benefits to private equities vs stocks?
Potentially. If you invest in private equity through an official government-supported scheme, such as EIS, SEIS or a venture capital trust, you may be eligible for income tax and/or capital gains tax reliefs. What you get, and how much, depends on the specific scheme and relies on you meeting certain criteria.
All stocks are equities, but not all equities are stocks. Stocks are equities that are publicly traded on a stock exchange (public equity). Private shares in a company (private equity) are not available through stock exchanges. Private equity can often be riskier, as companies that only have private equity tend to be smaller and newer, so have less of a proven track record. It’s often the territory of professional private equity firms. But if you’re willing to accept the higher risk in exchange for the potential for higher reward, there are ways that individuals can get exposure to private equity, through ETFs or crowdfunding opportunities.
Frequently asked questions
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
More guides on Finder
How to buy Casper Sleep shares
Ever wondered how to buy shares in Casper Sleep? We explain how and compare a range of providers that can give you access to many brands, including Casper Sleep.
How to buy Lowe’s Companies shares
Ever wondered how to buy shares in Lowe’s Companies? We explain how and compare a range of providers that can give you access to many brands, including Lowe’s Companies.
How to buy John Wiley & Sons shares
Ever wondered how to buy shares in John Wiley & Sons? We explain how and compare a range of providers that can give you access to many brands, including John Wiley & Sons.
How to buy DraftKings shares
Ever wondered how to buy shares in DraftKings? We explain how and compare a range of providers that can give you access to many brands, including DraftKings.
How to buy SpartanNash Company shares
Ever wondered how to buy shares in SpartanNash Company? We explain how and compare a range of providers that can give you access to many brands, including SpartanNash Company.
How to buy Xtrackers FTSE 100 Income UCITS ETF 1D
Ever wondered how to invest in XUKX ETF? Learn more about it now and find out where you can invest in it. Compare ETF brokers to start investing today.
How to buy iShares Core MSCI Japan IMI UCITS ETF USD Acc
Ever wondered how to invest in SJPA ETF? Learn more about it now and find out where you can invest in it. Compare ETF brokers to start investing today.
How to buy Lyxor Core MSCI Japan DR UCITS ETF Daily Hedged to GBP Acc
Ever wondered how to invest in LCJG ETF? Learn more about it now and find out where you can invest in it. Compare ETF brokers to start investing today.
How to buy SPDR FTSE UK All Share UCITS ETF Acc
Ever wondered how to invest in FTAL ETF? Learn more about it now and find out where you can invest in it. Compare ETF brokers to start investing today.
How to buy Franklin FTSE United Kingdom ETF
Ever wondered how to invest in FLGB ETF? Learn more about it now and find out where you can invest in it. Compare ETF brokers to start investing today.