Formula of Equity

What is Equity?

Equity, in simple terms, is your ownership stake in something minus any outstanding debt (money you owe). Think about it like this: imagine buying a house. The purchase price is the total cost, but you might put down a down payment and finance the rest with a mortgage. The down payment represents your initial equity, or ownership stake, in the house. The mortgage is your liability, or debt....

How Equity Works?

Equity refers to the ownership stake that investors have in a company. Suppose a company is like a giant pie, and each slice represents a unit of ownership called a share (also known as stock). When you invest in a company, you’re essentially buying shares, which grants you a tiny piece of the ownership pie. The total number of shares outstanding represents the entire ownership of the company. Shareholders have certain rights, such as receiving a portion of the company’s profits called dividends (if the company decides to distribute them) and voting on certain company decisions depending on the type of shares they hold....

How to Calculate Equity?

Now, how do we actually measure this equity? Here comes a handy formula that might seem intimidating at first, but it’s actually quite straightforward....

Formula of Equity

Equity = Total Assets - Total Liabilities...

Example of Equity

Imagine a small bakery has $100,000 in cash and equipment (assets) but also owes $20,000 on a loan (liability). Using the formula, the equity would be:...

Other Forms of Equity

We’ve focused on shareholder equity, but the concept of equity extends beyond just companies. Let’s study some other common types of equity you might encounter:...

Equity vs. Return on Equity

You might come across another term related to equity: Return on Equity (ROE). It’s important to understand the distinction between the two....

Equity and Financial Accounting

Equity plays a vital role in the world of financial accounting. It’s a key component of a company’s balance sheet, which is a financial statement that provides a snapshot of a company’s financial health at a specific point in time. The balance sheet equation is fundamental:...

Conclusion

Equity is like your ownership score. The higher it is, the stronger your financial position. Remember, equity is in your house, your investments, and even the value of your favorite brands. By understanding equity, you’ll be on your way to making informed financial choices and reaching your money goals!...

Equity – FAQs

How can I invest in equity?...