Equity vs Security
Equity refers to a form of ownership held in a firm, either by investing capital or purchasing shares in the company. Securities, on the other hand, represent a broader set of financial assets such as bank notes, bonds, stocks, futures, forwards, options, swaps etc. Forms of equity such as stock also come under the larger umbrella of securities. An individual wishing to invest his excess funds may select between a number of financial instruments which are of different types, characteristics, maturities, risk, and return levels. The article below shows a clear picture of what is meant by the terms equity and security, and shows how equity securities such as stock are different to other types of securities sold on financial markets.
Equity
Equity is a form of ownership in the firm and equity holders are known as the ‘owners’ of the firm and its assets. In simpler terms, equity is a form of capital that is invested into a business, or an asset that represents the ownership held in a business. Any company, at its stage of start-up, requires some form of capital, or equity, to begin business operations. Equity is commonly obtained by small organizations through the owner’s contributions, and by larger organisations through the issue of shares. In a company balance sheet, the capital contributed by the owner and shares held by a shareholder represent equity as it shows the ownership held in the company by others.
Equity can also refer to shares that are sold by a firm on a stock exchange. Once shares are purchased by an investor, they become a shareholder in the firm and hold an ownership interest.
Security
Securities refer to a broader set of financial assets such as bank notes, bonds, stocks, futures, forwards, options, swaps, etc. These securities are divided into different types depending on their distinguishing characteristics. Debt securities such as bonds, debentures, and bank notes are used as forms of obtaining credit and entitle the holder of the debt security (the lender) to receive principal and interest payments. Stocks and shares are equity securities and represent an ownership interest in the firm’s assets. The shareholder of the company can trade his shares on the stock exchange at any time. The return to the shareholder of tying up funds in shares is the income from dividends or capital gains in selling the share at a higher price than what it was bought for.
Derivatives such as futures, forward and options are the third type of security, and it represents a contract or agreement made between two parties to perform a specific action or to fulfil a promise at a future date. For example, a futures contract is a promise to buy or sell an asset a future date at an agreed upon price.
What is the difference between Equity and Security?
Equity is a form of capital held in a firm. In larger corporations, equity can be obtained by purchasing company stock. Company stock is referred to as an equity security; therefore equity securities are the manner in which a firm obtains equity. There are other securities such as bank notes, bonds, futures, forwards, options, swaps, etc. which can be classified as debt securities and derivatives.
Equity and securities are different to one another; while equity is the actual ownership interest in the firm, securities are financial instruments used to fulfil business requirements. Equity securities fulfil the need for capital; debt securities offer credit facilities, and derivatives are used for hedging and speculation purposes.
Summary:
Equity vs Security
• Equity is a form of ownership in the firm and equity holders are known as the ‘owners’ of the firm and its assets.
• Securities refer to a broader set of financial assets such as bank notes, bonds, stocks, futures, forwards, options, swaps, etc.
• Equity and securities are different to one another in that while equity is the actual ownership interest in the firm, securities are financial instruments used to fulfill business requirements. Equity securities fulfill the need for capital; debt securities offer credit facilities, and derivatives are used for hedging and speculation purposes.