Equity definition
/What is Equity in Accounting?
Equity is the net amount of funds invested in a business by its owners, plus any retained earnings. It is also calculated as the difference between the total of all recorded assets and liabilities on an entity's balance sheet. An analyst routinely compares the amount of equity to the debt stated on a balance sheet to see if a business is properly capitalized. A lender or creditor will usually only extend credit to a business if it has a high proportion of equity to debt.
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What is Equity in Finance?
The equity concept also refers to the different types of securities available that can provide an ownership interest in a corporation. In this context, equity refers to the following security types:
Common stock. This is an ownership share in a corporation. The holders of common stock have voting rights at shareholder meetings and the opportunity to receive dividends. If the corporation liquidates, then common stockholders receive their share of the proceeds of the liquidation after all creditors and preferred stockholders have been paid.
Preferred stock. Preferred stock is a class of equity ownership that has a more senior claim on the earnings and assets of a business than common stock. In the event of liquidation, the holders of preferred stock must be paid off before common stockholders, but after secured debt holders. Preferred stock also pays a dividend; this payment is usually cumulative, so any delayed prior payments must also be paid before distributions can be made to the holders of common stock.
What is Equity in Home Ownership?
For an individual, equity refers to the ownership interest in an asset. For example, a person owns a home with a market value of $500,000 and owes $200,000 on the related mortgage, leaving $300,000 of equity in the home.