Generally, equity is the value of an asset less the amount of all liabilities on that asset. As an accounting equation, one can represent it as Assets – Liabilities = Equity.
Equity can have somewhat different meanings, depending on the context and the asset type. In finance, you can think of equity as one’s degree ownership in any asset after subtracting all debts associated with that asset. For example, a car or house with no outstanding debt is entirely the owner’s equity because he or she can readily sell the item for cash and pocket the resulting sum. Stocks are equity because they represent ownership in a firm, even though ownership of shares in a public company rarely come with accompanying liabilities.
One could determine a business’ equity by determining its value, including any owned land, buildings, capital goods, inventory and earnings, and deducting liabilities like debts and overhead.
Stockholders’ equity is synonymous with shareholders’ equity: It represents the equity stake held on the books by a firm’s investors and shareholders. Its calculation is a firm’s total assets minus its total liabilities or as share capital plus retained earnings minus treasury shares. The firm lists this result on its balance sheets. Many refer to this as the book value of a company.
Private equity is the opposite of shareholders’ equity. It involves funding that is not noted on a public exchange. Private equity comes from funds and investors that directly invest in private companies or that engage in leveraged buyouts (LBOs) of public companies.
Equity Begins at Home
Home equity is roughly comparable to home ownership: The amount of equity one has in his or her residence represents how much of the home he or she owns outright. Equity on a property or home stems from payments made against a mortgage, including a down payment, and from increases in property value.
When determining an asset’s in calculating equity, particularly for larger corporations, it is important to note these assets may include both tangible assets, like property, and intangible assets, like the company’s reputation and brand identity. Through years of advertising and development of a customer base, a company’s brand can come to have an inherent value. Some call this value “brand equity,” which measures the value of a brand relative to a generic or store-brand version of a product.