What is Equity?
There are various types of equity, but put simply -- equity is ownership.
In the trading world, equity refers to stock. In the and corporate lending world, equity (or more commonly, shareholders’ equity) refers to the amount of capital contributed by the owners or the difference between a company’s total assets and its total liabilities.
In the world, equity refers to the difference between an asset’s market value and the debt owed on the asset.
How Equity Works (With Example)
Share certificates bearing the name of the shareholder, the number of issue is outlined in its corporate charter. When a company decides to sell additional to new or existing shareholders, this is sometimes called raising equity.
Although shareholder rights vary by company, one of the most prominent characteristics of equity is that it entitles the owner to vote on certain matters and to do so in proportion to the number of he or she owns. The company’s articles of incorporation and bylaws determine the number of votes each is entitled to.
As you can see in the sample for XYZ Company, equity is generally broken out into the par value of the , any additional paid in capital, and any retained by the company.
Why Equity Matters
Equity holders enjoy voting rights and other privileges that only come with ownership, because equity represents a claim on a proportionate share of a company’s assets and lenders’ claims, but only equity holders can truly participate in and benefit from growth in the value of the enterprise.
Some financial instruments have equity characteristics but are not actually equity. Convertible debt instruments, for example, represent loans that convert into when a company (the borrower) crosses certain thresholds, thereby turning a lender into an owner in certain events.