Difference between Equity and Security

Equity and security are two ways for a company to raise capital. For an investor, it represents his or her stake in  business and how that investment will be beneficial over a certain period of time.

When determining the difference between the two, equity  simply represents ownership in a firm. This can be done by investing capital or money, or by buying stocks.

The concept of security is a broader one, and represents various financial assets. Apart from equity securities (stocks), other forms include bank notes, futures, options, swaps, etc. Therefore, securities can simply represent a debt obligation, where you give loan to other businesses and in return, you will get interest payments and the principal amount after the duration ends.

The time frame also differs because an individual or a stockholder can take possession of the stock as long as he or she wishes to. However, most debt securities come with a maturity date, where the business will buy back the bond by paying you the amount.

There is larger risk associated with equity ownership, however, there is greater potential when it comes to making a profitable return. In case of securities, you can easily calculate the overall returns on your investment due to the less risk involved.

Having a stake in a company will also help you receive income in the form of dividends.  However, it is not mandatory for companies to give out dividends to its shareholders. Such scenario arises when the company is not performing well. Debt securities are most likely to pay you the overall amount when the maturity date arrives. However, they usually come with a call feature, where the business may buy the bond back before its maturity.

People usually invest in stocks and bonds in hope of doubling their money. This may not hold true for other securities, especially debt, where the income returns are usually controlled, but provide a stable investment route.

Instructions

  • 1

    Equity

    It is the money or capital invested by individuals, which represent their ownership in the business. Equity can simply be the initial investment made by the owners or could take the form of equity securities such as stocks.

    Image courtesy: aonetwork.com

  • 2

    Security

    It is a financial instrument comprising of various assets which can represent ownership, debt obligation or the right to ownership. Examples include stocks, bonds, notes, derivatives, options etc.

    Image courtesy: jmsadvisors.com

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