Equity (Investment)

Definition

The term equity refers to a security traded on a stock exchange that represents ownership in a company. The value of that ownership can be found using the company's assets and liabilities.

Calculation

Equity = Assets - Liabilities

Where:

  • Assets include both tangible (physical assets such as land, property and plant) and intangible assets (those that lack a physical structure such as goodwill, copyrights and patents.)
  • Liabilities include the debt of a corporation that results from a transaction involving the transfer of an asset or the provision of a service.

Explanation

Equity can have a variety of meanings, but generally refers to the net value associated with ownership. In the context of real estate, equity in a home is the current market value of the home, less all of the outstanding loans on the property such as a mortgage.

An investor can have equity in a publicly traded company by purchasing a share of common stock. Since equity holders are partial owners of a corporation, they may be granted certain rights such as the ability to vote for members of the company's board of directors. In financial terms, owners' equity is calculated by subtracting liabilities from assets and this metric can be found in a company's annual report. When discussing investments, equity is one of several types of securities. Equities are also one of the three types of asset classes held by investors along with bonds and cash.

Related Terms

index weighting, equity index, capitalization weight, price weight index, fundamental weight index