The Definition of Equity

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Generally, the definition of equity is the state or quality of being just, impartial, reasonable, fair. Depending on the context, equity can have a wider meaning. In terms of law, equity is a branch of the law system, developed alongside common law to supplement and serve in the modification of the rigorousness of common law, in terms of fairness and justice and it was administered hundreds of years ago in special courts. It also means any right to an asset or property, held by a stockholder (shareholder), sole owner or one of the owners (proprietor) or by a creditor.

In terms of accounting, the definition of equity is an ownership interest or claim of a holder in the form of common stock (ordinary shares) or preferred stock (preference shares) of a corporation. On a balance sheet, equity is represented by the funds contributed by the stockholder (owner) plus retained profit or minus the accumulated losses.  It represents the net worth of a person or company, total assets minus total liabilities; here also called shareholder’s equity or net worth or book value. When referring to cooperatives, equity corresponds to the member’s investment to which retained earnings are added, or from which losses are subtracted. In order to start a business, the owners need to contribute with  funds into the business to finance operations. Thus, a liability on the business is created in the form of capital as the business is a separate entity from its owners. For accounting purposes, businesses can be considered sums of liabilities and assets, which represents the accounting equation. After liabilities have been paid, the positive remainder is considered to be the owners’ interest in the business.

An equity investment is in general referred to as buying and holding shares of stock on a stock market by businesses and individuals in the prospect of income from dividends and capital gains, as the value of the stock rises. Usually, equity holders receive voting rights, i.e. they can vote on nominees for the board of directors (presented on a proxy statement received by the investor), as well as regarding certain important transactions, and also residual rights, which means that they share the company’s earnings. They also recover some of the company’s assets if it turns bankrupt, though in general,  their priority in recovering their investment is the lowest.

In real estate terms, the definition of equity is the difference between what a property is worth and what the owner owes against that property, meaning the difference between the value of the house and the mortgage or loan which remains to be paid on a house.

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