What is Equity? Equity is the difference between total assets and liabilities, which are the stockholder’s equity plus the proprietor’s equity minus the liabilities. In business, equity is equated with the market value of a business, also known as the retained earnings of the business. Equity is calculated for accounting purposes by deducting liabilities from the current value of the company’s assets.
The value of an equity portfolio is the total value of all the equity in it. This usually includes the amount of the debt of an enterprise, if any, as well as the original cost of the assets used to create it. Equity accrues in a variety of ways, including dividends paid to the shareholders, the use of retained earnings to buy new shares of stock, borrowing money from banks or other financial institutions, and using the net cash flow from the business to finance growth or retire existing liabilities. Equity can also be gained by selling some of a business’s assets to obtain additional capital.
An equity syndicate is a group of investors who invest in the same company. Their shares together add up to the value of that business. The value of each share in the syndicate is equal to 100 percent of the equity of the entire syndicate. Investors involved in such a scheme may be partners, banks, brokers, or individual investors.
A bondholder is an investor who owns a bond. Bonds are obligations of an agency, such as a corporation or a government. When a bondholder sells his bond, he becomes entitled to a part of the total value of the bond. This is known as “credited equity” because the bond is considered an asset on which the investor gains a benefit, when his bond is sold.
Types of Equity There are several types of equity. Two of the most popular include debt and equity stocks. These categories can be further categorized according to the sources from which they are drawn. Debt equity investments depend on the borrower’s ability to pay. If the borrower is unable to pay, his creditors may take legal action against him. When a creditor takes legal action against an individual, the investor may be liable for the payments of those debts.
Owner-owner equity allows investors to own shares in a business even if they do not directly own the business. They receive a dividend, as their share of the ownership is increased. As with any other type of equity, the shareholder must receive an entitlement first before being able to receive a dividend. Dividend paying stocks usually come from publicly traded corporations.
Venture capital funds are special interest groups that pool of money to invest in start-up companies. After the initial public offering, when the stock becomes well known, the investors can sell their shares for a profit. The value of shareholder equity depends on the profits that the business makes during its lifetime, as well as what the company does after going public.
Private equity managers are professionals who help new and small private equity investors to obtain the best capital investment opportunities. They analyze publicly traded equities for future opportunities. Capitalize on opportunities in sectors that you believe will be profitable for the long term. Leverage your risk factor, while capitalizing on an opportunity now.
All businesses have shareholders’ equity. Investors own a fraction, or the entire amount of the company, and therefore, have the right to a portion of the profits the business produces. For example, when oil and gas companies to produce a barrel of oil, they pay out to investors. If oil prices go up, the investors who owned a percentage of the oil company receive a percentage of the profits too. As an investor, you are only entitled to a percentage of the total profits, but as a shareholder, you have the right to get a large part of the profits too.
As a business owner, your asset value is your total assets minus your total liabilities. To determine your value, subtract your total assets from your total liabilities and then calculate your equity. It is imperative to know exactly what your total assets and total liabilities are because you may not be able to sell your business because it is too big. Also, you may want to consider selling your businesses’ interest in order to reduce your total liabilities. Remember, the only way to increase your shareholder equity is through increasing your total assets and total liabilities or decreasing your total assets and total liabilities and increasing your net worth.
Lastly, your profit and loss statement will list your equity. The bottom line is that allocating profits and losses is how you are able to determine your overall profits and losses. If you have an above average profit, you have equity, if you have an under average profit, you have a bad equity and so on. Your profit and loss statement, when compared with your balance sheet, will give you a good idea of your equity. So, next time you look at your balance sheet, instead of looking for ways to increase your equity, look for ways to decrease your total liabilities.