What is Negative Equity?
Negative equity occurs when liabilities exceed the value of assets.
How Does Negative Equity Work?
For example, let's assume that Company XYZ has $20 million of total assets and $40 million of total liabilities. Company XYZ has negative equity equal to $40 million - $20 million = $20 million.
Why Does Negative Equity Matter?
When assets fall in value or companies take on too much debt, negative equity can often be the result. Years of losses can also create negative equity, because those losses are carried over to the retained earnings portion of the balance sheet.
The concept of negative equity applies to individuals as much as it applies to companies. For example, homeowners whose houses lose value often find them selves with negative equity in their homes; that is, they owe more to the bank than the house is worth.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Low-risk, liquid investments that, upon purchase, do...Read More →
Like many of you, I like to stick with the basics when it comes to investing (finding good...Read More →
After the Facebook (Nasdaq: FB) public offering debacle and the August trading...Read More →
You probably remember the Beatles' famous lament “will you still need me, will you still feed me when I'm 64?" But the kind of anxiety many people experience about aging should extend...Read More →