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Equity

In short

Ownership stake in a company — stocks represent equity

Equity means ownership. When you buy a stock, you own a tiny piece of that company — including a claim on its future profits. If the company succeeds, your equity grows. If it fails, you can lose everything.

Equity represents ownership in a company and provides rights to residual assets and earnings. Common equity ranks last in the capital structure (behind debt and preferred equity) but has unlimited upside. Equity returns historically exceed bonds and cash over long periods.

Related concepts

  • Fixed Income — Fixed income investments (bonds) lend money to governments or companies and receive regular interest payments. Less exciting than stocks but provide stability and income. When stocks crash, bonds often rise — they're a safety net.
  • Asset Allocation — Asset allocation is how you divide your money between different types of investments. A classic '60/40' portfolio is 60% stocks, 40% bonds. It's the most important decision in investing — determines most of your long-term returns and risk.
  • P/E Ratio — Imagine buying a lemonade stand that makes $100/year. If it costs $2,000, the P/E is 20 — you need 20 years of earnings to pay it off. Lower means cheaper.
  • Return on Equity (ROE) — If you invest $100 in a business and it earns $20 profit, ROE is 20%. Higher means the company is better at making money with your investment.