Equity (finance)
Ownership interest measured as assets minus liabilities.
Wikipedia / Wikimedia Commons
In finance, equity is an ownership stake in property that might have debts or other claims against it. For accounting, it’s calculated by taking the value of owned assets and subtracting any liabilities. For instance, if a car is worth $24,000 and the loan balance is $10,000, the $14,000 difference is equity. This concept applies to a single item, like a house or car, or to an entire company. A business can sell equity to raise money that doesn’t need to be repaid on a fixed schedule. When liabilities on an asset are greater than its value, the shortfall is called a deficit, and the asset is often described as “underwater” or “upside-down.” In government or nonprofit settings, equity is referred to as “net position” or “net assets.”
The term “equity” comes from the system of equity law in England during the Late Middle Ages, which developed to handle growing commercial needs. Common law courts dealt with property title, while equity courts handled contractual interests in property. The same asset could have one owner in equity (holding the contractual interest) and another at law (holding the title indefinitely or until the contract ended). Contract disputes were judged on whether terms and administration were fair—that is, equitable.
For any asset bought with a secured loan, equity exists. Until the loan is paid off, the buyer doesn’t fully own the asset. The lender can repossess it if the buyer defaults, but only to recover the unpaid loan balance. The equity balance—the asset’s market value minus the loan balance—measures the buyer’s partial ownership. This can differ from the total amount paid on the loan, which includes interest and ignores changes in asset value. If an asset has a deficit, loan terms decide whether the lender can recover it from the borrower. Houses usually use non-recourse loans, where the lender accepts the risk of a deficit, while other assets use full-recourse loans, making the borrower responsible for any deficit. Equity in an asset can also back additional liabilities, like home equity loans or lines of credit, which increase total liabilities and reduce owner equity.
A business has a more complex debt structure than a single asset. Some liabilities are secured by specific assets, while others are guaranteed by the entire business. If the business goes bankrupt, it may have to sell assets to raise money. Business equity, like
- field
- Finance
- known_for
- Ownership interest measured as assets minus liabilities; basis of stock investing and accounting
- related_concepts
- Shareholders' equity, net position, deficit, underwater assets
Lore & Background
The term 'equity' describes this type of ownership in English because it was regulated through the system of equity law that developed in England during the Late Middle Ages to meet the growing demands of commercial activity. While the older common law courts dealt with questions of property title, equity courts dealt with contractual interests in property. The same asset could have an owner in equity, who held the contractual interest, and a separate owner at law, who held the title indefinitely or until the contract was fulfilled.
Reader's Guide
Equity is a foundational concept in finance and accounting, representing the residual interest in assets after deducting liabilities. It applies to single assets like cars and houses, as well as entire business entities. In accounting, the fundamental equation requires that total liabilities plus equity equal total assets. Equity appears on a balance sheet in various forms, including share capital, retained earnings, and treasury stock. For investors, equity investing involves purchasing stock to gain partial ownership, with expectations of dividends or price appreciation. The legal foundation of equity includes limited liability, meaning owners are not required to pay a firm's debts themselves so long as the firm's books are in order. Valuation of equity does not solely depend on the shareholder equity balance; factors such as business prospects, credit access, and buyer availability also matter. The Merton model values stock-equity as a call option on the value of the whole company, reflecting the protection of limited liability.
Did You Know?
- When liabilities attached to an asset exceed its value, the difference is called a deficit and the asset is informally said to be 'underwater' or 'upside-down'.
- In government finance or other non-profit settings, equity is known as 'net position' or 'net assets'.
- The term 'equity' originated from the English system of equity law developed during the Late Middle Ages.
- Equity holders typically receive voting rights, meaning they can vote on candidates for the board of directors.
More in Finance And Investment 1-24
Spotted an error? Know more?
This is a living reference — every entry is fact-audited, and reader corrections feed straight into our audit queue. Suggest an edit · See this site's audit record