Glossary
Equity
Ownership in a company: shares of stock, or on the balance sheet the assets left after subtracting liabilities.
Equity means ownership. In markets, "equities" is another word for stocks, the shares that give their holders a residual claim on a company's profits and assets. In accounting, equity is what is left of a company's assets after every liability is paid. The two meanings are linked: shareholders own the residual, and its book amount is shareholders' equity. Knowing which sense is in play avoids a lot of confusion when reading filings or account statements.
The accounting identity
Equity grows when the company retains profits or issues new shares, and shrinks with losses, dividends and buybacks. It can turn negative after years of losses or heavy buybacks funded by debt, which some well-known profitable companies show today.
Other everyday uses
- Account equity. In a brokerage margin account, equity is the market value of the securities minus the loan from the broker. Margin rules are written in terms of this number.
- Home equity. The value of a house minus the mortgage balance.
- Private equity. Ownership stakes in companies that are not publicly traded, and the funds that buy them.
The common thread is the same subtraction: what you own minus what you owe.