Finance Dictionary
Equity
Definition
The value of the shares issued by a company, or the value of an ownership interest in property.
Deep Dive
Equity, in a corporate finance context, represents the residual value of an asset or company after all liabilities have been deducted. It is the ownership stake that shareholders have in a company and is a fundamental component of the accounting equation: Assets - Liabilities = Equity. For a business, equity can consist of various components, including common stock, preferred stock, additional paid-in capital, and retained earnings, all reflecting the cumulative investment by owners and the accumulation of past profits that have not been distributed as dividends.
Examples & Use Cases
- 1A homeowner's equity in their house increases as they pay down their mortgage over time and as the property's market value appreciates.
- 2A startup company raises equity capital by issuing new shares to venture capitalists, giving them an ownership stake in the business.
- 3A business's balance sheet shows retained earnings as a major component of its total shareholder equity, representing profits reinvested into the company.
Related Terms
AssetsLiabilitiesShareholder Capital