Equity is the ownership of any asset after any liabilities associated with the asset are cleared. For example, if you own a car worth $25,000, but you owe $10,000 on that vehicle, the car represents $15,000 equity.
It is the value or interest of the most junior class of investors in assets.
If liabilities still exceed assets then there is negative equity and if assets exceed liabilities there is positive equity.
Shareholder’s equity
Equity is also what a shareholder owns in a corporation, entitling him or her to part of that entity’s profits (dividends) and a measure of control (shareholder voting rights).
The word ‘equity’ is used in several financial compound terms. For example, ROE, which stands for return on equity, compares a firm’s net profit directly to the value of its equities.
Businesses can be considered sums of liabilities and assets (the accounting equation) for accounting purposes. When business owners start funding operations in their business this creates a liability on the business in the form of a share of capital (as the business is its own separate entity).
Ownership equity
This concept is important because when companies file for bankruptcy secured creditors are paid against the proceeds from assets. Ownership equity is the last claim against assets (paid after all creditors have been paid).
Ownership equity is also known as liable capital or risk capital.
The meaning of the term equity also depends on the context of its use. A car or house with no debt left to pay is the owner’s equity because he or she can go ahead and exchange the item for cash.
In the context of real estate, home equity represents the current market value of a property minus any outstanding mortgage or loan amounts, reflecting the homeowner’s financial stake in the property.
Examples of the different natures of entity include:
- Preferred stock
- Share capital
- Capital surplus
- Retained earnings
- Treasury stock
- Stock options
- Reserves
In startup companies, equity is frequently used as a form of compensation, offering employees stock options or shares in the company as part of their remuneration package, which aligns their interests with the growth and success of the business
In non-financial English, ‘equity’ means the quality of being impartial and fair, as in this sentence “That company is an example of equity – it treats people the same and pays them equally for doing the same job.”
Derivatives from the root word ‘equity’
Several derivative words can be formed from the root word ‘equity,’ covering different parts of speech such as nouns, adjectives, and adverbs. Let’s have a look at some of them:
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Inequity (noun)
The state of being unfair or unjust; lack of equity. As in:
“The social activists are fighting against the inequity in the education system.”
- Equitableness (noun)
The quality of being fair and impartial. As in:
“Her equitableness in handling disputes made her an excellent mediator.”
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Equitable (adjective)
Characterized by fairness and impartiality; just and right. As in:
“The judge’s equitable decision ensured that all parties involved received fair treatment.”
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Inequitable (adjective)
Not fair or equal; unjust. As in:
“The workers protested the inequitable policies that favored management over staff.”
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Equitably (adverb)
In a manner that is fair and impartial. As in:
“The resources were distributed equitably among the members of the community.”
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Inequitably (adverb)
In a way that is not fair or equal. As in:
“The funds were distributed inequitably, leading to complaints from less favored departments.”
Unlike some other nouns in English, “equity” does not have a direct verb form.
Video – What is equity?
This video, from our YouTube partner channel – Marketing Business Network, explains what ‘Equity’ means using simple and easy-to-understand language and examples.