Equity
is a fundamental term in finance that means the residual interest or claim on
the majority of an investor’s assets following the fulfillment of all
liabilities. In essence, equity is the amount of ownership in a good, product,
or entity.
Equity
exists when an individual purchases an asset of some sort and recoups the
return on the investment through payments made. Equity can refer to an
assortment of capital assets. For instance, ownership in a corporation in the
form of common or preferred stock is a popular form of equity. Although the
person who purchases stock does not tangibly incorporate a piece of the business
into their savings, they become linked to the business’ model; if the company
does well and makes money the individual will see a return on equity through an
increase in the stock price.
Equity can also refer to the total amount of
assets an individual owns minus all liabilities or costs. This calculation of
equity, also known as a net worth, is the predominant calculation used to
figure out an individual’s financial standing.
The
term equity has a different raw definition based on the market of capital assets.
For instance, in real estate equity is the difference between what a piece of
property is worth and what the owner owes against the property. To further
clarify, equity in real estate is the difference between the value of the home
or property versus the remaining loan or mortgage payments on the property.
Individuals who invest in all capital assets are looking for a return on
equity, or in basic terms, a profit.
