What is Equity? Definition of Equity, Meaning of Equity
Definition and meaning of Equity – Explaining with a financial perspective, equity is basically the overall difference between one’s total assets and total liabilities. Suppose that you purchased a house of worth $300,000 in which $200,00 remains unpaid, subtracting the second value from the first would yield your equity amounting to $100,000. Such equation has varied applications which can better explain the nature of this concept.
Forms of Equity
- Shareholder’s Equity– Within a corporation, a shareholder’s equity refers to one’s “share” in the net revenue of a corporation after all expenses and payables are settled or subtracted from it. This amount is independent on how much an individual invested in total to finance the operations of a company. Shareholder’s equity is also affected by varied factors including the business’ growth rate, profitability, financial ratio, and other economic conditions.
- Common Stock – This first shareholder’s equity subtype refers to an individual’s degree of ownership of a corporation considering his participation in the business’ financial activities including paying dividends and regaining capitals. Moreover, this form of equity grants the power to elect corporate officials including the Senior Officers, Board of Directors, and finance related officers.
- Preferred Shares– Considered as a more secure form of equity, preferred shares feature a predefined dividend and a prioritized claim on the company’s revenue. In the event that owners of preferred shares have an unpaid dividend balance, such amount must be settled first before revenue is disbursed to common stock holders. However, holders of this type aren’t given the right to vote and have little involvement in the creation of internal policies.
- Warrants – The last type of shareholder’s equity is more of an “added option” for owners of preferred shares. Without the purchase of a common stock, a holder of a warrant is given participation in the capital gains and losses of the company. However, a warrant comes with an exercise price ( the amount that a holder can covert such warrant into common stocks of an issuer) and an expiry date (end of the period when the warrant can be converted).
- Private Equity– This form involves direct investments that finance private corporations. It often covers fields that need adequate funding including scientific researches and technological developments. Institutional and accredited investors are the ones commonly engaged with these since they are more capable of disbursing significantly large amounts of money within a long span of time.
- Home Equity– Purchasing a real estate can be rather expensive, thus an individual may opt to apply for a home loan. In such perspective, home equity refers to the difference between the fair market value of the property and the remaining amount payable to cover up a mortgage loan. Home equity is also referred to as real property value.
- Ownership Equity– Applied in the context where the company goes bankrupt and needs to undergo liquidation, ownership equity is defined as the amount of money left after all liabilities or debts have been paid. If required, it can possibly be reduced to zero in the event that not all accounts payable have been settled yet.