WATCH NOW: What Is Equity?
Equity has many definitions. Equity can mean something different for individuals, shareholders, and business owners. In this video, learn each of the definitions of equity and how they function.
Fact checked by Katharine BeerReviewed by Thomas Brock
Equity typically refers to the ownership of a public company or an asset. Shareholders’ equity is the net amount of a company’s total assets and total liabilities listed on the company’s balance sheet. Investors commonly own shares of stock in a publicly traded company as shareholders.
Key Takeaways
- Equity typically refers to the ownership of a public company or an asset. An individual might own equity in a house but not own the property outright.
- Shareholders’ equity is the net amount of a company’s total assets and total liabilities as listed on the company’s balance sheet.
- Shareholders’ equity is an important metric for investors and shows how well a company’s management is using its equity from investors to generate profit.
Ownership and Equity
Equity can refer to the extent of ownership of an asset. For example, an owner of a house with a mortgage might have equity in the house but not own it outright. The homeowner’s equity would be the difference between the market price of the house and the current mortgage balance.
In the case of a corporation, stockholders’ equity and owners’ equity mean the same thing. However, in the case of a sole proprietorship, the proper term is the owner’s equity, as there are no stockholders. The equity of a corporation owned by one individual should also be listed as stockholder’s equity because one person owns 100% of the stock.
Shareholder’s Equity
Shareholders’ equity is the net amount of a company’s total assets and total liabilities, which are listed on a company’s balance sheet. In part, shareholders’ equity shows how much of a company’s operations are financed by equity.
Shareholders’ equity is the amount that would be returned to shareholders if all the company’s assets were liquidated and all its debts repaid. Shareholders’ equity also includes retained earnings, which is the amount of profit leftover that is saved or retained and used to pay dividends, reduce debt, or buy back shares of stock.
Important
Shareholders’ equity is found by subtracting Total Liabilities from Total Assets.
Return on Equity (ROE)
Shareholders’ equity represents a company’s net worth. Market analysts and investors prefer to see a stable balance between the amount of retained earnings that a company pays out to investors in the form of dividends and the amount retained to reinvest back into the company.
Shareholders’ equity is an important metric for investors. The metric is used to determine the ratio return on equity (ROE). ROE is the result of a company’s net income divided by shareholders’ equity, and the ratio is used to measure how well a company’s management is using its equity from investors to generate profit.
What Is Private Equity?
The value of equity for an investment that is publicly traded is readily available by looking at the company’s share price and its market capitalization. Companies that are not publicly traded have private equity and equity on the balance sheet is considered book value, or what is left over when subtracting liabilities from assets.
What Do Companies Use Equity For?
Equity is raised by a company through shares and this capital is then used to purchase assets, invest in projects, and fund operations.
How Do Homeowners Use Their Equity?
Home equity can be used to get a home equity loan, a second mortgage, or a home equity line of credit (HELOC). An equity takeout is taking money out of a property or borrowing money against it.
The Bottom Line
Equity reflects the level of ownership of a public company or an asset. An individual might own some equity in a house but still hold a mortgage or loan. Shareholders’ equity is the net amount of a company’s total assets and total liabilities. Shareholders’ equity represents a company’s net worth.
Read the original article on Investopedia.