What Is Equity? Definition, Market Value And Examples
Mridula Sharma22 Nov, 2023
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Equity is the sum of money that a company's owner has contributed or owns. The difference between a company's assets and liabilities as shown on its balance sheet is used to calculate equity. Based on the current share price or a value set by investors or valuation experts, equity is judged to be valuable.
Equity grants shareholders certain rights and privileges within the company, including voting rights and the entitlement to a share in the company's profits through dividends.Meaning of Equity
Equity, in the context of finance and business, refers to the ownership interest or claim that shareholders hold in a company. In simpler terms, equity signifies the portion of a business that belongs to its owners after all debts have been settled. In financial terms, equity is often expressed as the "shareholder's equity" on a company's balance sheet. This distinction highlights the net worth of the business, which is distributed among its shareholders.Types of Equity
Equity represents a core element in corporate finance, shaping how companies are funded, managed, and governed. Here are some of the key types of equity based on a different basis:Ownership Basis:
Common Equity: Represents ownership through common shares, entitling shareholders to voting rights and dividends.
Preferred Equity: Offers priority over common shareholders for dividends and assets but often lacks voting rights.
Investment Basis:
Private Equity: Investemnts in private enterprises that are not listed on public stock markets.
Public Equity: Refers to investments in shares of publicly traded companies available on stock markets.
Geographic Basis:
Domestic Equity: Involves investments in companies operating within a specific country.
International Equity: Relates to investments in foreign companies outside one's home country.
Market Capitalization Basis:
Large-Cap Equity: Investments in large, well-established companies with significant market capitalization.
Mid-Cap Equity: Refers to investments in medium-sized companies with moderate market capitalization.
Small-Cap Equity: Involves investments in smaller companies with lower market capitalization.
Industry Basis:
Sector Equity: Refers to investments in companies operating within a specific industry sector, such as technology, healthcare, or energy.
Style Basis:
Growth Equity: Involves investments in companies expected to experience above-average growth in earnings and revenue.
Value Equity: Relates to investments in companies considered undervalued or trading below their intrinsic worth.
Employee Basis:
Employee Equity: Represents ownership stakes granted to employees through stock options or restricted stock units as part of compensation packages.
Homeownership Basis:
Home Equity: The value of ownership that homeowners possess in their property after deducting outstanding mortgage loans.Accounting Basis:
Common Stock Equity: Represents the residual interest in assets after subtracting liabilities on a company's balance sheet.
Shareholders' Equity: The total value of common and preferred equity combined, reflecting the net worth of a company.
Social Basis:
Equity in Society: Refers to fairness and justice in the distribution of resources, opportunities, and privileges among individuals, regardless of their backgrounds.
Features of Equity
Understanding the key features of equity aids in comprehending its importance and varied characteristics. Below is a tabular representation of the essential features of equity:| Features of Equity | |
| Feature | Description |
| Ownership Interest | Equity denotes ownership stakes held by shareholders, providing them with a claim on the company's assets and earnings. |
| Voting Rights | Shareholders with equity typically possess voting rights, allowing them to participate in major corporate decisions. |
| Dividends | Equity holders may receive dividends, which are a portion of the company's profits distributed to shareholders. |
| Capital Appreciation | Equity investments can experience capital appreciation, potentially increasing in value over time. |
| Risk and Returns | Equity carries a higher risk compared to debt, but it also offers the potential for higher returns on investments. |
| Long-Term Perspective | Equity investments often involve a long-term perspective, as shareholders may benefit from the company's growth over time. |
| Influence on Management | Equity shareholders may have the ability to influence the company's management decisions through voting and board representation. |
| Priority in Liquidation | In the event of liquidation or bankruptcy, equity holders are last in line to receive assets after debt holders and other creditors. |
| Common and Preferred Equity | Equity can be classified into common and preferred types, each having distinct rights and privileges for shareholders. |
| Role in Capital Markets | Equity plays a crucial role in capital markets, where publicly traded companies issue shares to raise funds and enable investment liquidity. |
Factors Affecting the Value of Equity
The value of equity in a company is influenced by various factors that play a crucial role in determining the attractiveness of its shares to investors. Here are the key elements that affect the value of equity:- Company Performance
- Economic Conditions
- Industry Outlook
- Market Sentiment
- Dividends and Earnings
- Debt Levels
- Competitive Positioning
- Management Quality
- Regulatory Environment
- Global and Geopolitical Factors
- Investor Demand and Supply
What is Equity Share Capital?
Equity share capital refers to the portion of a company's funding that is raised by issuing shares to investors in exchange for ownership stakes. These shares represent ownership interests in the company and entitle shareholders to certain rights, such as voting in company matters and receiving dividends. Equity share capital is a crucial component of a company's capital structure and represents the residual value of assets after deducting liabilities. It provides a foundation for financial stability and plays a vital role in attracting investors to participate in the company's growth and success.What is Equity Mutual Fund?
An equity mutual fund is a type of investment fund that pools money from multiple investors to invest primarily in stocks or equities of different companies. The fund is managed by professional portfolio managers who aim to achieve capital appreciation over the long term by strategically investing in a diversified portfolio of stocks. Equity mutual funds offer individual investors an opportunity to participate in the stock market with reduced risk due to diversification and professional management.Advantages and Disadvantages of Equity
Advantages:
- Ownership stake in the company
- Voting rights and influence in decision-making
- Potential for capital appreciation
- Dividends from company profits
- Long-term investment perspective
- Enhances financial stability
- Aligns interests of shareholders and the company's success
Disadvantages:
- Higher risk compared to debt
- Dilution of ownership with new equity issuances
- Shareholder conflicts and differing interests
- Lower priority in case of bankruptcy or liquidation
- Dividend uncertainty based on company performance
- Potential for share price volatility
- Need to share profits with shareholders
What Is Equity? FAQs
What is the book value of equity?
What is the market value of equity?
What is the equity market?
What is the Equity Formula?
What is an Equity fund?
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