Business
What Is Equity and How It Works
Learn what equity is, why it's a key financial metric, and how it represents ownership in an asset. Understand its importance for investors.
What is it?
Equity represents the value of ownership in an asset after deducting all associated liabilities. In the context of a company, it's known as shareholder equity—the amount of money that would be returned to shareholders if all assets were liquidated and all debts were paid off. It is calculated as Assets - Liabilities. For an individual, a common example is home equity, which is the market value of a property minus the outstanding mortgage balance. Essentially, equity is a core measure of an entity's net worth, fundamental to both corporate finance and personal accounting.
Why is it trending?
Equity is a perennial topic in finance, gaining traction during periods of stock market growth and with the rise of startup culture. The surge in retail investing and financial literacy initiatives has brought concepts like shareholder equity to a wider audience. Furthermore, in fluctuating real estate markets, conversations about building home equity as a wealth-creation tool are constant. The popularity of employee stock options as a form of compensation also keeps equity a trending keyword among professionals seeking to understand their financial stake in a company's success.
How does it affect people?
Equity directly impacts an individual's financial health and potential for wealth creation. For investors, owning equity (stocks) provides a claim on a company's future profits through dividends and capital appreciation. For homeowners, building equity is a primary method of increasing personal net worth, which can later be leveraged for loans or to fund retirement. For entrepreneurs and employees with stock options, equity represents a potential significant financial reward for their contributions. It is a powerful tool for building long-term financial security and achieving major life goals.