Equity – the absence of avoidable or remediable differences among groups of people, whether those groups are defined socially, economically, demographically, or geographically.
In finance, the term has 5 meanings.
- Shares or any other securities evidencing an equity interest in a company.
- In a company’s balance sheet, it means the number of funds contributed by owners (shareholders) plus retained earnings (or uncovered losses). In this case, “equity” can be translated as shareholders’ equity. It is also sometimes called “shareholders’ equity.
- In the context of margin trading, “equity” refers to the value of securities in a margin account minus funds borrowed from the broker.
- In the context of real estate transactions, “equity” means the difference between the current market value of the property and the amount the owner still has left to pay under the mortgage agreement. This is the amount the owner would have received after the property was sold and the mortgage debt was repaid.
- In terms of investment strategies, “equity” (most often referring to stocks in this context) is one of the major asset classes. The other two classes are fixed-income assets (such as bonds) and cash and cash equivalents. These classes are used in asset allocation planning to structure the desired risk/return profile for an investment portfolio.
The meaning of the term “equity” is highly context-dependent. In finance, it usually refers to any assets in the owner’s possession after all debts associated with those assets have been paid in full. For example, a car or house that is not bought on credit is considered equity because the owner can readily sell it for cash. Shares are equity because they give the owner the right to own the company.