Equity is a term used in finance and accounting that refers to the ownership interest that an individual or entity has in an asset or business. It represents the residual value of an asset or business after all liabilities are paid off.
In the context of a company, equity represents the portion of the company that is owned by shareholders. It can be issued in the form of common stock or preferred stock, and shareholders have the right to receive dividends and to vote on important company matters, such as the election of board members.
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Equity can come in different forms some of which include;
- Shareholder Equity: In a business, it represents the ownership interest of the shareholders or owners. It is the residual claim on assets after deducting liabilities. Shareholder equity is calculated as the difference between a company’s total assets and total liabilities, often presented on the balance sheet. It represents the net worth or book value of a company.
- Stockholder Equity: Stockholder equity is another term used interchangeably with shareholder equity, specifically referring to the ownership interest in a corporation held by its stockholders.
- Home Equity: In the context of homeownership, home equity represents the current market value of a property minus any outstanding mortgage or other debts secured by the property. It is the portion of the property’s value that the homeowner truly owns. This can increase over time as the homeowner pays down the mortgage or if the property appreciates in value.
- Private Equity: This refers to investments in privately-held companies that are not traded on public stock exchanges. Firms in this type of business invest capital in companies in exchange for ownership stakes. These firms typically aim to improve the value of the companies and generate a return on their investment over a certain period.
