What is equity?
Equity is the amount that is owned, rather than owed. In simplest terms, it is the debt-free value of an asset.
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Three most common types
In practice, there are typically three definitions of equity that are most frequently used that are slightly more specific:
The money a company receives from investors in exchange for partial ownership rights.
When a company needs to raise funds – for example, to pay for new projects or expansion – it can raise investment equity by selling the rights to a portion of its assets. If the company decides to close and sells, or ‘liquidates’, all its assets, investors are entitled to a portion of the proceeds because of their investment.
Shares of stock are the most common type of investment equity, as they represent that the shareholder owns a small portion of the company that issued the stock.
Example: If Company ABC sells one million shares of stock for $25 per share, then it has raised $25,000,000 of equity. If ABC is not publicly traded but receives the same amount from private investors, it has raised $25,000,000 in private equity.
Real estate equity
Equal to the value of a property, minus the amount owed on any
mortgages or loans.
Example: If you have a home worth $300,000 and you have $180,000 left to pay on your mortgage, then you have $120,000 in home equity.
If you have equity in your home, you may be able to get cash out by taking out a home equity loan. You can also get a home equity line of credit, or HELOC, that allows you to use the equity in your home to fund other expenses, much like a credit card.
The value of a business after subtracting its debts and liabilities.
It is the amount that would be left over if a company sold all its assets – such as its
property and investments – and paid off all its financial obligations – such as loans,
equipment leases, and taxes.
Example: Company ABC has $1,000,000 in total assets and $400,000 in total liabilities. Therefore, ABC has $600,000 in Owner’s Equity. If ABC is a publicly traded company with shareholders, then this is called Shareholder’s Equity because the shareholders are the owners of the company.
- More and more companies are starting to raise equity through crowdfunding campaigns rather than selling shares of stock. In 2015, companies using crowdfunding campaigns raised $2.5 billion.