Short definition: Equity represents the ownership interest in a company or asset.
Explanation: In the context of a company, equity refers to the residual value of assets after liabilities (debts) have been paid off. It represents the shareholders’ claim on the company’s assets and earnings.
Example: A homeowner’s equity is the value of their house minus the outstanding mortgage balance. For a business, equity can consist of various components like common stock, preferred stock, additional paid-in capital, and retained earnings.
Additional information (optional): Equity can be calculated as:
Equity = Total Assets – Total Liabilities
Equity holders have a claim on the company’s profits, either through dividends or through an increase in the value of their shares.