Starting out
Equity
Also called Stock or Share
A share of ownership in a company, giving you a claim on what is left after everyone else is paid.
How it works
Owning equity makes you a part-owner of the business. You are entitled to a share of the profits the company chooses to distribute, and to a share of whatever remains if it is wound up and all its debts are settled. That last part is why equity is called a residual claim.
The residual position is what makes shares both the most rewarding and the most punishing common asset class. Lenders get paid first and get paid a fixed amount. Shareholders get whatever is left, which over decades has been a great deal, and in a bankruptcy is usually nothing.
Where it misleads people
People describe shares as "safer" when the company is large and famous. Size changes the odds of total loss, not the order of the queue. A shareholder in a giant company is still behind every lender in that company.
Worked example
A company earns $100m, pays $30m of interest to lenders and $20m of tax. The remaining $50m belongs to shareholders — whether it is paid out as a dividend or reinvested in the business.
Related terms
- ShareOne unit of ownership in a company — the smallest slice of its equity you can hold.
- DividendA cash payment a company makes to its shareholders out of its profits.
- BondA loan you make to a government or company, which pays you interest and returns your money on a set date.
- Limited liabilityThe rule that a shareholder can lose what they invested and no more, whatever the company owes.
- ShareholderSomeone who owns shares in a company, and with them a vote and a claim on its profits.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.