Word of the Week 'Equity'


What is 'Equity '

Generally, equity is the value of an asset less the amount of all liabilities on that asset. As an accounting equation, one can represent it as Assets - Liabilities = Equity.

BREAKING DOWN 'Equity '

Equity can have somewhat different meanings, depending on the context and the asset type. In finance, you can think of equity as one’s degree ownership in any asset after subtracting all debts associated with that asset. For example, a car or house with no outstanding debt is entirely the owner's equity because he or she can readily sell the item for cash and pocket the resulting sum. Stocks are equity because they represent ownership in a firm, even though ownership of shares in a public company rarely come with accompanying liabilities.

The following are more specific definitions for the various forms of equity:

  1. A stock or any other security representing an ownership interest. This may be in a private company, in which case it is a private equity.

  2. On a company's balance sheet, the amount of the funds contributed by the owners or shareholders plus the retained earnings (or losses). One may also call this stockholders' equity or shareholders' equity.

  3. In margin trading, the value of securities in a margin account minus what the account holder borrowed from the brokerage.

  4. In real estate, the difference between the property's current fair market value and the amount the owner still owes on the mortgage. It is the amount that the owner would receive after selling a property and paying any liens. Also referred to as “real propertyvalue.”

  5. In investment strategies, equities are one of the principal asset classes. The other two classes are fixed-income (bonds) and cash/cash-equivalents. These are used in asset allocation planning to structure a desired risk and return profile for an investor's portfolio.

  6. When a business goes bankrupt and has to liquidate, equity is the amount of money remaining after the business repays its creditors. This is most often called “ownership equity,” but some call it risk capital or “liable capital.”

Calculating Equity

One could determine a business' equity by determining its value, including any owned land, buildings, capital goods, inventory and earnings, and deducting liabilities like debts and overhead.