A reader asks me through email about the differences between some similar financial jargons.
KCLau,
When reading financial books, I will come across terms below and I have problem to differentiate them. Can you tell me the differences?
1. equity, share and stock
2. bond and money marketTeo
First, let me show a trick to quickly look up for definitions of a word or phrase. Last time before the existence of the World Wide Web, we have to look for the meaning of a word with the help of a dictionary. I’ve forgotten the last time I checked up something in the dictionary ever since I got to know this trick.
Open up your web browser and go to www.google.com
Type “define: XXXX” in the search box and press enter.
For example, if you want to look for the definition of equity, type “define: equity”.
You will get this search result.
Equity, Share, and Stock
Equity = the ownership interest of shareholders in a corporation
Share = any of the equal portions into which the capital stock of a corporation is divided and ownership of which is evidenced by a stock certificate; “he bought 100 shares of IBM at the market price”
Stock = the capital raised by a corporation through the issue of shares entitling holders to an ownership interest (equity); “he owns a controlling share of the company’s stock”
In very simple terms:
Let’s say Mr. Tan started a business with his wife registered as Tans Sdn. Bhd.
He and his wife Susan own the company’s shares.
When the company is listed as a public company to raise more capital, the capital raised is called “stock”. The stock certificates are issued to other investors who pay to own shares of the stock.
As Tan family and other investors own the shares of the company’s stock, they own the equity. Equity is the ownership of the share of a business; shares are units of the equity or stock. You can say that equity is more general than stock.
When the business remains Tans Sdn. Bhd., Mr. Tan and his wife own the shares of equity of the company, but not the stock (because the company hasn’t gone public listed).
When Tans Sdn. Bhd becomes TANS BHD. (already listed at Bursa Malaysia), they all own the shares of the stock of the public corporation. Stock is also the equity.
In fact, you don’t really need to be annoyed by these jargons. All you need to know is
invest in stock = invest in share = invest in equity
Bond and Money Market
Bond = a certificate of debt (usually interest-bearing or discounted) that is issued by a government or corporation in order to raise money; the issuer is required to pay a fixed sum annually until maturity and then a fixed sum to repay the principal.
Money Market = the market for short-term debt securities, such as commercial paper, certificates of deposit and Treasury bills, with a maturity of one year or less. Typically, these are safe, highly liquid investments.
Well, the main difference is that for bond, the term is longer (e.g. 3, 5, 10, 20 years etc)
For money market, the term is very short (less than a year).
Money market has the lowest investment risk. The return is also relatively low, even lower than Fixed Deposit.
Can you explain this in even simpler sentences?
{ 3 comments… read them below or add one }
Good and clear explanation. Your sharing on how to use google to get the meaning of a word is something new to me. I have not used such a function before. Thanks.
very well defined the differences of equity, shares and stock…am pleased with it..
It is very good and brief definitions of this jargons . I think it useful for monerization . Sabah . A . E .