Glossary Terms

What is Equity in Regard to Finance?

What is Equity in Regard to Finance?
Reviewed by Melissa Cook
Updated November 6, 2022

Equity, in finance, refers to the value of ownership in a company. This can be measured by subtracting the company’s liabilities from its assets. In other words, equity represents the portion of a company that is owned by its shareholders.

A high level of equity indicates that a company has a strong financial position and may even have room for growth. On the other hand, a low level of equity may signal financial trouble and potentially put investors at risk.

It is important for companies to maintain a healthy level of equity as it not only impacts their own financial stability but also affects shareholder confidence and overall market performance. Proper management of equity can lead to long-term success for both individual companies and the economy as a whole.

Types of Equity in Finance

There are two main types of equity in finance: common and preferred. Common equity represents the ownership stake held by common shareholders, who have voting rights and may receive dividends. Preferred equity, on the other hand, is owned by preferred shareholders and does not usually come with voting rights. However, preferred shareholders often receive preferential treatment in terms of dividend payments and have a higher claim to assets in the event of bankruptcy.

Another important type of equity is employee stock ownership, which refers to when a company’s workers hold shares in the business they work for. This can be a valuable form of compensation and can also align employees’ interests with those of the company’s success.

Overall, understanding different types of equity can help investors make informed decisions and can also be valuable for companies looking to attract and retain talented employees. With proper management, equity can lead to successful long-term growth for all parties involved.