Search Dictionary

Definition of 'Equity'

In accounting terms, a company's balance sheet is made up of equity and liabilities on one side and assets on the other side. In other words, a company's equity is the net of the assets minus the liabilities.

This equity represents the net asset value of a company and is physical worth of the owners of the equity. However, a company's equity value is not just based on the net value of what it owns but on the potential of its future earnings. As such there is a non-tangible element that usually values the equity higher than the net asset value.

In corporations the equity is represented by common stock or preferred stock. Public corporations have their stock (shares) traded on stock exchanges which allow for transparent pricing of their stock through the market auction process. This is also known as shareholder's equity.

In the housing market equity refers to the difference between the value of the house and the amount still outstanding on the mortgage. This represents the cash (equity) that the owner would walk away with if he or she sold the house and paid off the loan or mortgage. Since the Global Financial Crises started many homeowners who bought in the years just before the start and at the start of the GFC have subsequently slipped into negative equity where the value of the house is worth less than what is owed on it.

Do you have a trading or investing definition for our dictionary? Click the Create Definition link to add your own definition. You will earn 150 bonus reputation points for each definition that is accepted.

Is this definition wrong? Let us know by posting to the forum and we will correct it.