Financial terminology can be confusing, but we’re help to help you make sense of it. We’ll occasionally post “jargon busters” to help you decode the often-indecipherable lexicon of finance and investing.
“Equity” is another way of saying “ownership“. When you talk about the equity you have in your home, for example, it’s a way of talking about what portion of the home you’ve paid for.
When it’s used in a business sense, equity, or having equity in a company, is another way of saying “common stock“. Basically, equities represent ownership in a company. That means that you, as a partial owner, bear some risk of when the enterprise does poorly and also reap some rewards when it does well.
The risk and reward are reflected by movements in the share price. This means that you do not receive a direct economic benefit (or penalty) from an equity’s price change unless you sell it. This is the same as with your house: when you already own your house, the market price of the house continues to fluctuate. However, this doesn’t affect you very much until you choose to sell your house or buy a new one.
