Shareholder vs. Equity Holder

By Markets Fool.com

Both of these terms are used to describe an ownership interest in a company, but don't have the exact same meaning. Specifically, shareholders are a particular type of equity holders. "Equity holders" is a broader term that refers to shareholders as well as everyone else with an ownership interest in a business.

Continue Reading Below

What is a shareholder?
A shareholder is a person who owns shares of stock in a company. Whether public or private, a share of stock in a company represents a fractional ownership interest, and may be sold to the public through an offering, or privately placed. If you buy shares of stock, you own a proportional ownership interest, based on the number of shares you own and the total number of outstanding shares. For example, if a certain company has 100,000 outstanding shares and you buy 1,000 of them, you will have a 1% ownership interest in the company.

There are two main types of shares: common and preferred. Common stock refers to most of the stocks that are traded on the major exchanges, and the price and dividends paid can fluctuate over time. A share of stock entitles the owner to a portion of the company's success or failure, and also entitles them to vote for the company's board of directors, but does not come with any operational control of the business. If a company does well, common shares can increase in value.

On the other hand, preferred stock represents an equity interest that pays a set dividend amount, quarter after quarter, and year after year. Because of this, the price of preferred stock is tied to the dividend amount and the company's financial strength or credit rating, not the profitability of the business.

How can an equity holder not be a shareholder?
Simply put, some businesses don't have "shares." A sole proprietorship, for instance, has just one owner, who owns a 100% equity stake (but no shares). A partnership is an arrangement under which two or more investors each own an equity stake in the business, but there is no stock and therefore no shareholders. For example, if you and three of your friends decide to form a partnership and open a restaurant, you all have equity in the business, but nobody owns shares.

To sum it up, all shareholders are equity holders, but not all equity holders are shareholders. It is possible to have an ownership interest in a business that does not issue shares of stock.

Continue Reading Below

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors based in theFoolsaurus. Pop on over there to learn more about our Wiki andhow you can be involvedin helping the world invest, better! If you see any issues with this page, please email us atknowledgecenter@fool.com. Thanks -- and Fool on!

The article Shareholder vs. Equity Holder originally appeared on Fool.com.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.