Equity

What is 'Equity ' ?

Generally speaking, equity is the value of an asset less the amount of all liabilities on that asset. It can be represented with the accounting equation: Assets -Liabilities = Equity.

BREAKING DOWN 'Equity '

Equity can have somewhat different meanings, depending on the context and the type of asset. In finance in general, you can think of equity as one’s degree ownership in any asset after all debts associated with that asset are paid off. For example, a car or house with no outstanding debt is considered entirely the owner's equity because he or she can readily sell the item for cash, and pocket the resultant sum. Stocks are equity because they represent ownership in a firm, though ownership of shares in a public company generally does not 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 (not publicly traded), in which case it is called private equity.
2. On a company's balance sheet, the amount of the funds contributed by the owners (the shareholders) plus the retained earnings(or losses). Also referred to as  stockholders' equity or  shareholders' equity (see below).
3. In the context of margin trading, the value of securities in amargin account minus what has been borrowed from the brokerage.
4. In the context of  real estate, the difference between the current fair market value of the property 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 off the mortgage. Also referred to as “real property value.”
5. In terms of investment strategies, equities are one of the principal  asset classes. The other two 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, the amount of money remaining (if any) after the business repays its creditors. This is most often called “ownership equity” but is also referred to as risk capital or “liable capital.”

Calculating Equity

One could determine the equity of a business by determining its value (factoring in any owned land, buildings, capital goods, inventory and earnings) and deducting liabilities (including debts and overhead).

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