The difference between equity and shares



The difference between equity and shares

In: Economics

Equity is ownership of something. It is how much of the thing belongs to you, vs. belonging to someone else. So, if you have a $500k house with a $300k mortgage, your equity is $200k – you ‘own’ $200k of the house’s value while the bank ‘owns’ the other $300k (because of the morgtage). This is the crux behind the core financial formula: Assets – Debt = Equity.

Shares are just how equity is divided in certain company types. In order to make it easy to calculate how much of a company an individual or investor owns (and make it easy to buy/sell that ownership), the available ownership is divided up into shares, each representing a specific % ownership of the company. If a company has 1,000 total shares and you own 600 shares, you own 60% of the company – or 60% of the total equity.

The company will publish how much _total_ equity the company has on its balance sheet (one of the four key financial statements). The individual stockholder can then calculate how much of that equity belongs to them by dividing that equity amount by total shares outstanding and multiplying that by how many shares they own.

Equity is an overall stake/ownership amount in something, shares are how that may be divided up. If you and a friend have a lemonade stand, you might each have a 50% equity stake in it. When it grows into a gigantic chain of lemonade stands and goes public, you’d each have shares in representing whatever your stake is at that point. Maybe you each have 100,000 shares representing 20% equity, while other other 60% of your company’s equity is owned by other investors.