A distinction is made between 'equity in businesses' and 'directly held stocks'. The former refers to ownership stakes in particular, often non-publicly traded, businesses. The latter specifically denotes shares of ownership in companies that are traded on a stock exchange.

Equity in Businesses vs. Directly Held Stocks

Equity signifies an ownership stake in an asset. Specifically in business, equity refers to the collection of all company shares (stocks), and its total value is equal to the company's net worth. The concept of equity extends more generally to represent the net worth of any entity, such as a household or project. This financial term should not be confused with the concept of fairness, which is another meaning of 'equity'.

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Shares, also referred to as stocks, represent a form of financial asset that gives the holder partial ownership of a company's assets and a claim to its profits. When these shares are traded on a public stock exchange, they are often referred to as 'directly held stocks'.

Shares (Stocks)

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Microeconomics

Large corporations are characterized by having numerous owners, who can be individuals or institutions. These owners, or shareholders, typically play no role in the firm's management. Instead, strategic and operational decisions are delegated to a specialized group of professional managers.

Ownership Structure of Large Corporations

A key distinction between shares and bonds lies in their return structure and maturity. Bondholders receive guaranteed payments, providing a predictable return. In contrast, shareholders' returns are not guaranteed as they directly depend on the firm's profitability. Furthermore, shares do not have a specified maturity date and can be held indefinitely, unlike bonds which have a fixed term.

Comparison of Shares and Bonds

Equity (Ownership)

The stock market is the financial marketplace where the shares of publicly held companies are issued and traded among investors.

Stock Market

A shareholder's claim on a company's profits is directly proportional to the number of shares they own relative to the total number of shares issued.

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