Equity Explained

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.