Equity (finance)

For equity securities, see Stock.

In accounting and finance, equity is the difference between the value of the assets and the cost of the liabilities of something owned. For example, if someone owns a car worth $15,000 but owes $5,000 on a loan against that car, the car represents $10,000 equity. Equity can be negative if liability exceeds assets.


For purposes of liquidation during bankruptcy, ownership equity is the equity which remains after all liabilities have been paid.

Ownership equity

When starting a business, the owners fund the business to finance various operations. Under the model of a private limited company, the business and its owners are separate entities, so the business is considered to owe these funds to its owners as a liability in the form of share capital. Throughout the business's existence, the equity of the business will be the difference between its assets and liabilities; this is the accounting equation.

When a business liquidates during bankruptcy, the proceeds from the assets are used to reimburse creditors. The creditors are ranked by priority, with secured creditors being paid first, other creditors being paid next, and owners being paid last. Ownership equity (also known as risk capital or liable capital) is this remaining or residual claim against assets which is paid only after all other creditors are paid. In such cases where even creditors could not get enough money to pay their bills, the ownership equity is reduced to zero because nothing is left to reimburse it.

Equity investments

Main article: Stock trader

An equity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and firms in anticipation of income from dividends and capital gains. Typically, equity holders receive voting rights, meaning that they can vote on candidates for the board of directors (shown on a diversification of the fund(s) and to obtain the skill of the professional fund managers in charge of the fund(s). An alternative, which is usually employed by large private investors and pension funds, is to hold shares directly; in the institutional environment many clients who own portfolios have what are called segregated funds, as opposed to or in addition to the pooled mutual fund alternatives.

A calculation can be made to assess whether an equity is over or underpriced, compared with a long-term government bond. This is called the yield gap or Yield Ratio. It is the ratio of the dividend yield of an equity and that of the long-term bond.


In financial accounting, owner's equity consists of the net assets of an entity. Net assets is the difference between the total assets and total liabilities.[1] Equity appears on the balance sheet (also known as the statement of financial position), one of the four primary financial statements.

The assets of an entity can be both tangible and intangible items. Intangible assets include items such as brand names, copyrights or goodwill. Tangible assets include land, equipment, and cash. The types of accounts and their description that comprise the owner's equity depend on the nature of the entity and may include:

Book value

The book value of equity will change in the case of the following events:

Shareholders' equity

When the owners are shareholders, the interest can be called shareholders' equity; the accounting remains the same, and it is ownership equity spread out among shareholders. If all shareholders are in one and the same class, they share equally in ownership equity from all perspectives. However, shareholders may allow different priority ranking among themselves by the use of share classes and options. This complicates analysis for both stock valuation and accounting.

Shareholders' equity is obtained by subtracting total liabilities from the total assets of the shareholders.[3] These assets and liabilities can be:

Market value of shares


Equity in real estate

The notion of equity with respect to real estate comes the equity of redemption. This equity is a property right valued at the difference between the market value of the property and the amount of any mortgage or other encumbrance.

See also


  1. IFRS Framework quotation: International Accounting Standards Board F.49(c)
  2. Example of Balance Sheet
  3. Hervé Stolowy; Michel Lebas (January 2006). Financial Accounting and Reporting: A Global Perspective. Cengage Learning EMEA. p. 42. ISBN 1-84480-250-7.