Equity is the value of an asset minus its liabilities. And while there are many different kinds of equity such as home equity, stock and shareholder equity, owner's equity, and business equity (to name a few), most have similar application.
For many kinds, equity is the degree of ownership and/or income after debts are subtracted. It can also be defined as the value of a portion (or share) of a company or business.
According to Merriam-Webster, the definition of equity is "the money value of a property or of an interest in a property in excess of claims or liens against it." Equity can mean value or ownership, which are both key terms in different kinds of equity (like owner's equity vs. home equity).
In other words, equity is the remaining stake, share or value of property (whether that be a home, stock, or business) once any debts or liabilities are subtracted.
In businesses, equity can represent the value of assets like stocks, property and land, buildings, and inventory or goods. Liabilities can represent things like overhead or outstanding debts. Or, equity can be defined in reference to share values issued by a company.
It is possible to have negative equity as well, if the value of the property is less than the debts or liabilities against it.
How to Calculate Equity
The basic equation for equity is simple: assets - liabilities = equity.
For example, a common home equity problem is if a house is worth $300,000 and the loan on the house is worth $100,000, the remaining equity is $200,000 ($300,000 - $100,000 = $200,000). Fairly simple stuff.
However, there are several different kinds of equity, with varying equations.
Owner's equity, for example, is frequently used in business or small businesses. The way owner's equity works is by subtracting the money or assets the owner has taken out of the business (non-salary draws, or money taken out of the business by a partner or proprietor) from the total amount the owner invests in the business.
What Is Total Equity?
As the name would suggest, total equity is simply the total liabilities subtracted from the total assets. In businesses and companies, total assets would include both current and long-term assets.
Total equity can also mean adding common stock equity to preferred stock equity.
By calculating total equity, you can determine the total value of the company via the amount invested by shareholders plus additional earnings. Total equity is calculated by adding up all of the assets (like cash and inventory, for example) and subtracting all of the liabilities (like long-term debt and accounts payable).
Different Kinds of Equity
The main different kinds of equity include stock and shareholder equity, home equity, owner's equity, and investment equity (the list goes on, but you get the picture).
Various kinds of equity are used for different purposes. For example, a homeowner may wish to learn how to build equity in their home (the amount they actually own) in preparation for a sale, or a business may need to determine their equity in order to sell shares or stocks. Whatever it may be, different kinds of equity provide different information.
Stock and Shareholder Equity
Stockholder (or shareholder) equity is the value of the company held by shareholders. It is the remaining amount of assets left over once liabilities from a company have been subtracted - or, the company's net value.
The simple equation for shareholder equity uses the balance sheet to calculate the total assets minus total liabilities. The shareholder equity is divided by the number of shareholders of the stock. In most cases, stockholder or shareholder equity is the retained earnings after a company has paid its liabilities, which can be accumulated over time or subtracted from original investment.
Shareholder equity is not the same as net tangible assets, however, because shareholder equity includes intangible assets in its calculation, while net tangible assets do not. Intangible assets may include things like brand names and logos, patents and the like.
As the name suggests, the equity for stockholders and shareholders rests primarily in stocks.
Equity Stock and Investment
Equity investment is the purchasing or selling of stocks for profit or capital gains, typically by firms or individuals. Equity stock is essentially a part ownership of a company that entitles the investor to a portion of the company's earnings or assets. Equity stock does not have the same evaluation as market price for the stock, since equity stock is valued based on the company's cash flow, balance sheet and other long-term estimators like profits.
Equity investments are typically higher risk than debt investments, given that their return on investment is more subject to market fluctuations than debt investments.
Equity stock comes in the form of common or preferred stocks. Common stock is issued by all publicly traded companies, whereas preferred stock, which gives the shareholder higher dibs on the payment of dividends than common, is not always issued by companies.
Equity funds are typically hedge funds or mutual funds that mostly buy common stock in businesses (equity). Individuals may invest in equity funds as a means to stake ownership in a company(s). However, equity funds may also procure private equity for their investors by buying stock in private (non-publicly traded) companies.
Equity funds offer diversified portfolios for investment, giving them a good reputation for first-time investors wishing to keep risk low.
Equity funds hinge on investing in companies that will generate profit for investors, unlike bond funds, which lend money to companies or the government on interest.
With tens of thousands of equity fund options, it can be hard to know where to start when considering investing. Still, researching the top equity funds can give you an idea of where your money will be best placed.
Small- vs. Large-Cap Equity
Small-cap equity generally describes equity for small companies or even banks that is within a range of market capitalization, and is often not public. Small cap delineates a company's market capitalization, or value of its outstanding shares, which are generally estimated between $300 million and $2 billion. Small cap equity is often a target for private equity funds, and recent reports may show that investing in small cap equity is safer given international economic volatility.
Large-cap equity refers to major companies with typically at least a $5 billion to $10 billion market capitalization. Some of the biggest large-cap companies include Apple (APPL) , Alphabet (GOOGL) and Microsoft (MSFT) . In general, large-cap companies can be found in the S&P 500
Home equity is related to the value of real estate and homes. Home equity is essentially the value of the house with any loans or mortgages subtracted from it. If you are a homeowner, it's the portion of your home that is actually yours.
To determine home equity, subtract any mortgages or loans from the property at its fair market value.
Home equity can also refer to the owner's personal interest or asset. In which case, a home with remaining equity (after liabilities have been subtracted) of $100,000 would be the owner's personal asset.
Home equity can appreciate or depreciate either by the property value increasing or debt decreasing. For most homes, having a shorter-term mortgage loan is better for increasing or building equity.
Real Estate Investment Trusts are income-producing real estate investment opportunities. Equity REITs deal in real estate opportunities in shopping, office, or apartment buildings working on a leasing basis. There are plenty of options of REITs to invest in today.
In basic terms, business equity is the total assets such as inventory and earnings minus the total liabilities like overhead and loans.
For companies, equity shows up on their balance sheet. To find a company's equity, simply use the above equation, adding the current and long-term assets (noncurrent assets such as equipment, intangible assets or investments) plus retained earnings and subtracting all liabilities from that total. Once again, total assets - total liabilities = equity.
Boiled down, equity accounting is a way to determine income from investments. While there are different ways to calculate equity on a balance sheet (depending on the type of equity you are determining), equity accounting is the method by which to determine profits from investment.
Owner's equity, sometimes called the book value of the company, is the equity that a business owner or stakeholder has in a business or company with a sole proprietorship or partnership. It is typically the equity capital left over after the owners pay back the shareholders and liabilities.
Essentially, owner's equity is the residual claim on business assets. Owner's equity may be zero if paying back creditors or shareholders has depleted the capital.
Equity capital is, quite simply, the business or organization's capital used to exchange for shares, or capital raised by the owners in exchange for ownership. While some kinds of capital (like debt capital) are repaid to investors, equity capital is the amount of money not repaid. Essentially, it is similar to owner's equity in that it represents the stakeholder's risk investment in the company. Equity capital is sold as a right to the company's current assets in exchange for capital.
Equity Capital Markets
Equity stocks as well as bonds, futures, initial public offerings, and more are transacted in equity capital markets, which act as a bridge between companies and financial institutions looking to increase the company's equity capital.
The ECM operates off of company information that is used to help the companies issue new stock and raise capital. Financial institutions involved in facilitating these trades are compensated by the underwriting spread (the difference between the price offered and paid of issued securities or shares by the underwriters when a company issues securities). In financial institutions, the underwriters are those who assume the risk of a fee from issuing a public offering. In the ECM, underwriters help determine the IPO offering price.
While there are dozens of kinds of equity, it is important to know the basics in order to invest wisely or build your own.