Difference Between Equity vs Shares
Equity and Shares is an important term in Business and Finance. Equity vs Shares are both the same terms but there is a thin line of difference between the two. Equity and Shares both the terms are in relation to ownership of the Company.
What is Equity? The equity of the company refers to Capital invested by the Owners of the Company and Profit accumulated by the company during the tenure of business which is also called as Reserves and Surplus. Equity is also called a net worth of the company. In accounting language, Equity is the value of assets that is left after paying off the Liabilities. It can be written in Equation:
Equity = Assets- Liabilities
It is shown at the Liability side of the Balance sheet. And, it always carries a credit balance. While preparation of Financials Statement of Business, capital contribution by owners and profits are written differently according to the formation of Business. If Business is in the form of Private Limited Company or Public Limited Company “Equity” is written. In the case of Partnership Firms and Proprietorships, it is written as “Capital”. The Equity of the Company consists of:
- Shareholder’s Equity and
- Reserves and Surplus (For Example, Profit and Loss Reserves, Security Premium Reserve, Capital Reserves, Retained Earnings etc.)
Every Owner of the business invests in his company for the expansion of the business. When a company requires more for expansion, it can bring equity on its own or it can go to the Public for raising the money. People who invest in the company become Shareholders of the company. Shareholders of the company are also called as the Owners of the company as they have invested in companies like owners. And, as owner’s they share the Profit and Loss of the company also. In the balance sheet, it is written as “Shareholder’s Equity”.
“Reserves and Surplus” is the second component of Equity. Reserves and Surplus is profit accumulated by business for various purpose. All profit is allocated according to specific reserves. This is used for business in the future. This is also one of the components of Equity.
If we are talking about the Equity of Company, we are talking about the Shareholder’s Equity and Reserves and Surplus it has. The Equity can be Positive Equity or it can be Negative Equity. Positive Equity means a company has sufficient Assets to repay it’s all the Liabilities. Negative Equity means a company has Liabilities more than its Assets. Whenever there is negative equity, it does not give a good sign of the company’s growth.
When owners of the company do not have sufficient funds, they go to the public for raising the money. The amount of money which is to be invested is divided into portions. This portion is called Share. When we go to the dictionary meaning of share it is “have a portion of (something)” Likewise Shares of the company is a division of capital of the company into various portions.
Let’s take an example for understanding, there is a Company named as ABC Limited, it needs the capital of Rs. 100 Crores for expansion. It will go to the public for raising the capital. The capital of ABC is divided into 1,000,000 shares of Rs. 1000 each amounting to Rs. 100 Crores. So, if a person wants to invest, he has bought from 1,000,000 shares at a rate of Rs. 1000 each. Let us say Mr. X wants to invest Rs. 500,000/- in the company, for this he has to buy 500 shares of Rs. 1000 each. Let’ say Mr. Y buy 700 shares of Rs. 1000 each which means that Mr. Y is having shares of Rs.700,000. Here, Mr. X & Mr. Y become the shareholders of the company and they will share the Profit and Loss of the company proportionate to their holdings.
From this example, it is clear that Shares is a division of Capital. There are various types of Shares Company can issue for raising the capital like Ordinary Shares, Preference Shares, Redeemable shares, non-redeemable shares, Cumulative Preference shares etc.
Head to Head Comparison between Equity vs Shares (Infographics)
Below is the top 6 difference between Equity vs SharesKey Differences between Equity vs Shares
Let us discuss some of the major differences between Equity vs Shares.
- Equity is Capital Invested by Owners in Company, whereas Shares are the division of Capital or Equity.
- It refers to the Value of Business as a whole, whereas Share refers to the amount of contribution in Business.
- Equity of Company consists if Shareholder’s Equity and Reserves and Surplus, whereas Shares consist of only Shareholder’s Equity.
- Equity is riskier as compared to Shares
- There are various types of Shares like Preference Shares, Redeemable Shares, Ordinary Shares etc. whereas there is no type of Equity as such.
- Equity covers Shares, whereas there is no vice-versa
- Equity can be called as Net assets of Business, whereas Shares are the only capital contribution of business.
Equity vs Shares Comparison Table
Let’s look at the top 6 Comparison between Equity vs Shares.
|The Basis Of Comparison Between Equity vs Shares||Equity||Shares|
|Meaning||Capital invested in the Business||Division of Equity into portions|
|Types of Equity||No types||Various types like Ordinary Shares, Preference shares, redeemable shares etc.|
|Equation||Equity = Assets- Liabilities||Shares =(Assets-Liabilities-Reserves and Surplus) Price per share|
|Addition of||Shareholder’s Equity + Reserves and Surplus||Shareholder’s Equity|
|Scope||Broader Term||Narrow Term|
From the above, it can be said that Equity vs shares both has some differences. Equity is Larger Term and shares are part of Equity of Company. Both Equity vs shares terms are very commonly used in Finance. It is a very important term in the Stock Market. It helps to decide the size of the business. So both the terms should not be interchanged.
This has been a guide to the top difference between Equity vs Shares. Here we also discuss the Equity vs Shares key differences with infographics and comparison table. You may also have a look at the following articles to learn more –