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.
What’s the best way to invest in private equity stock?
If you’re keen to get exposure to private equities, your best bet is probably to consider an ETF that invests in publicly-listed private equity firms. By investing in such funds, you are likely to get exposure to a more niche area of the market, with the potential for decent rewards.
But bear in mind that while investing in an ETF spreads your risk compared with investing directly in a private company, a private equity ETF may carry more risk of losses than an ETF that focuses on stock in large, well-established, publicly-listed companies.
If you’re particularly supportive of a small company and its products, and want to help it to succeed, check if it offers the opportunity for crowdfunding investment. Crowdfunding relies on a large number of people investing, so the amount each individual contributes can be relatively small. Some well-known brands, such as Brewdog, have used crowdfunding investment to grow. Just be aware that for every success story, there are many more small companies that never get properly off the ground. So don’t invest any money that you’re not prepared to lose.
Bottom line
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
They can be, yes. Companies that are listed on a stock exchange tend to be bigger, more established, and with more of a proven track record. They’re not a sure thing, but they tend to be lower risk than start-ups that are too new to yet be publicly listed, and so rely on private equity investment. If private firms succeed (and potentially go on to be listed), they can offer the chance of big rewards. But they could also go bust. Depending on how you acquire private equity, these principles may not always apply. But they’re a good rule of thumb to bear in mind.
You can buy public equity – aka stocks – in any company that is listed on a stock exchange. For example, British companies listed on the London stock exchange include the likes of Just Eat, Ocado and Ted Baker. Private equity can be harder for individual investors to get their hands on. Well known companies that have crowdfunded in the past include Brewdog and Monzo. You can find companies currently looking for crowdfunding investment on platforms such as Crowd for Angels and Republic Europe (formerly Seedrs).
Neither is better or worse. It all depends on your investment strategy and attitude to risk. Stocks (or public equities) are more accessible for individual investors, as they can be easily traded on a stock exchange. Companies listed on a stock exchange also tend to be bigger and better established, so are (relatively) lower risk. Note, we didn’t say no risk! Companies that only offer private equity tend to be newer and smaller, and therefore higher risk (to the point you might lose everything). But, if you can get your hands on a private share in the company, there’s also the chance of securing a share in an acorn that will one day grow into a massive oak tree.
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.
Ceri Stanaway is a researcher, writer and editor with more than 15 years’ experience, including a long stint at independent publisher Which?. She’s helped people find the best products and services, and avoid the pitfalls, across topics ranging from broadband to insurance. Outside of work, you can often find her sampling the fares in local cafes. See full bio
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