Simply put:
Equity = Assets – Liabilities
However, since there are a number of different types of assets, this definition cannot encompass them all and will have different meanings for each. The following are some common definitions for different equities:
- An ownership equity is represented by a security such as a stock. This can be in a private company which does not trade publicly.
- Shareholder’s equity refers to the funds that are contributed by the owners or shareholders along with losses. This is mentioned in a balance sheet.
- Equity is also considered to be the value of securities in a margin account but not including the amount that is borrowed by the brokerage. This is common in margin trading.
- In real estate, equity is the difference between the existing fair market value and the amount owed on mortgage by owner of the property. The amount will be received by the owner after the property is sold off and the mortgage has been paid off. This is also known as real property value.
- In investment strategies, equity refers to stocks and these are part of the main asset classes besides cash equivalents and bonds. These are used during asset allocation planning.
- Ownership equity or risk capital refers to the amount of cash that is left after a business goes bankrupt, liquidates and pays off all of its creditors.
The meaning of all of the abovementioned terms can differ according to context. You can perceive equity as ownership in an asset after the debts that belong to it are paid off. For instance, if you have a car that is free of debt then it will be considered your sole equity since you can sell it for cash without facing difficulties. There will be no outstanding debt between you and the sale in other words.
Further Reading
- The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle – www.sciencedirect.com [PDF]
- Equity in health care finance and delivery – www.sciencedirect.com [PDF]
- The Puzzle of Equity Financing Preference in China's Listed Companies [J] – en.cnki.com.cn [PDF]
- Equity in the finance of health care: some further international comparisons – www.sciencedirect.com [PDF]
- Analysis of equity warrants as investment and finance instruments. – elibrary.ru [PDF]
- Underperformance in long-run stock returns following seasoned equity offerings – www.sciencedirect.com [PDF]
- Capital market imperfections, high‐tech investment, and new equity financing – academic.oup.com [PDF]
- On the social representations of intergenerational equity – papers.ssrn.com [PDF]
- An equity perspective on access to, enrolment in and finance of tertiary education – www.tandfonline.com [PDF]
