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A swap in which the at least one of the two legs is the cash flow from some equity instrument like a stock. For example, the counterparties to an equity swap may agree to exchange the dividends from two stocks of roughly the same value. Alternatively, they may exchange the capital gains from a stock index for an interest rate calculated over a nominal value. Equity swaps may take a variety of forms, but all exist in order to diversify the cash flows of the parties without requiring them to buy anything new. An equity swap may also help one or both parties legally avoid taxation.
An exchange of the potential appreciation of an equity's value and dividends for a guaranteed return plus any decrease in the value of the equity. An equity swap permits an equity holder a guaranteed return but demands the holder give up all rights to appreciation and dividend income.