{"id":218554,"date":"2021-07-27T12:03:13","date_gmt":"2021-07-27T11:03:13","guid":{"rendered":"https:\/\/www.pearlaccountants.com\/?p=218554"},"modified":"2023-05-23T08:01:06","modified_gmt":"2023-05-23T08:01:06","slug":"what-is-equity","status":"publish","type":"post","link":"https:\/\/www.pearlaccountants.com\/blogs\/what-is-equity\/","title":{"rendered":"What Is Equity? Every Finance Definition of Equity under the Sun!"},"content":{"rendered":"\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"2481\" height=\"14119\" src=\"https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/07\/What-is-Equity-01.png\" alt=\"What is Equity Infographic\" class=\"wp-image-218692\" srcset=\"https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/07\/What-is-Equity-01.png 2481w, https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/07\/What-is-Equity-01-180x1024.png 180w\" sizes=\"(max-width: 2481px) 100vw, 2481px\" \/><\/figure>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p>Perhaps no word elicits more confusion in the financial world than \u201cequity.\u201d Although the dictionary has several specific meanings for the word, those meanings have changed and morphed. Equity means one thing in accounting, something different in the stock market, and also something else in real estate!<\/p>\n\n\n\n<p>In this article, we\u2019re going to take a <em>deep dive<\/em> into the subject of equity in financial contexts, all its shades and nuances, and match those up with real-world examples so that you can finally and definitively lay the word <em>equity<\/em> to rest and really know what it means!<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/what-is-equity\/#Basic_definition_of_equity\" title=\"Basic definition of equity\">Basic definition of equity<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/what-is-equity\/#In_finance_equity_basically_means_ownership\" title=\"In finance, equity basically means ownership.\">In finance, equity basically means ownership.<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/what-is-equity\/#What_is_equity_in_investment\" title=\"What is equity in investment?\">What is equity in investment?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/what-is-equity\/#What_is_owners_equity\" title=\"What is owner\u2019s equity?\">What is owner\u2019s equity?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/what-is-equity\/#What_is_equity_financing\" title=\"What is equity financing?\">What is equity financing?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/what-is-equity\/#What_is_private_equity\" title=\"What is private equity?\">What is private equity?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/what-is-equity\/#What_is_a_Debt-to-Equity_DE_Ratio\" title=\"What is a Debt-to-Equity (D\/E) Ratio?\">What is a Debt-to-Equity (D\/E) Ratio?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/what-is-equity\/#What_is_shareholders_equity_ratio\" title=\"What is shareholders\u2019 equity ratio?\">What is shareholders\u2019 equity ratio?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/what-is-equity\/#What_is_an_equity_market\" title=\"What is an equity market?\">What is an equity market?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/what-is-equity\/#What_is_home_equity\" title=\"What is home equity?\">What is home equity?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/what-is-equity\/#What_is_a_home_equity_loan\" title=\"What is a home equity loan?\">What is a home equity loan?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/what-is-equity\/#A_summary_of_equity\" title=\"A summary of equity\">A summary of equity<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Basic_definition_of_equity\"><\/span><a><\/a>Basic definition of equity<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"In_finance_equity_basically_means_ownership\"><\/span><strong>In finance, equity basically means ownership.<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The <a href=\"https:\/\/www.etymonline.com\/word\/equity\">source<\/a> of the word equity means \u201cquality of being equal or fair, impartiality.\u201d And although the plain-English word still means that, the financial use of it might appear to be a far cry from what it once meant.<\/p>\n\n\n\n<p>But if you think about it, <em>owning what is truly yours<\/em> is fair and just. In a financial context, equity is all about showing who owns what and making sure it\u2019s fair.<\/p>\n\n\n\n<p>By the 1620s, the word had expanded to also mean \u201can equitable right, that to which one is justly entitled\u201d\u2014like shares in a company, or a portion of a home.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_equity_in_investment\"><\/span>What is equity in investment?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<div class=\"wp-block-columns is-layout-flex wp-container-core-columns-is-layout-1 wp-block-columns-is-layout-flex\">\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\">\n<p>We\u2019re going to keep things <em>really simple<\/em>. One of the most frustrating things about financial topics is that they seem to be written in such a way that only insiders can understand. That\u2019s not cool. So, here\u2019s an explanation for the rest of us:<\/p>\n\n\n\n<p><strong>In its most basic form, in the investment world, <em>equity<\/em> means <em>shares<\/em> in a company. <\/strong>Back in the day, shares were purchased by screaming stockbrokers from the floor of the London Stock Exchange (LSE) or the New York Stock Exchange (NYSE). These days, people buy them from the comfort of their own homes or their offices, using programs designed specifically for it. There are even stock market apps for mobile, like <a href=\"https:\/\/robinhood.com\/\">Robinhood<\/a> or <a href=\"https:\/\/www.acorns.com\/\">Acorns<\/a>, which allows you to buy \u201cmicro-shares\u201d.<\/p>\n\n\n\n<p>When a company\u2019s shares go up, you make a profit.<\/p>\n\n\n\n<p>When people own <em>shares<\/em> they own <em>equity<\/em>. Another word for shares is stock.<\/p>\n\n\n\n<p><strong>Equity = stock = shares.<\/strong><\/p>\n<\/div>\n\n\n\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\">\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"747\" src=\"https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/07\/What-is-equity-in-investment-1024x747.png\" alt=\"What is equity in investment\" class=\"wp-image-218694\" srcset=\"https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/07\/What-is-equity-in-investment-1024x747.png 1024w, https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/07\/What-is-equity-in-investment-300x219.png 300w, https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/07\/What-is-equity-in-investment.png 1950w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_owners_equity\"><\/span>What is owner\u2019s equity?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>Owner\u2019s equity<\/em> is basically what you, as the owner of your business, truly <em>own<\/em> in that business, after paying off your debts and liabilities.<\/p>\n\n\n\n<p>Remember, the basic meaning of equity in finance is <em>ownership<\/em>.<\/p>\n\n\n\n<p>The owner\u2019s equity can be represented by looking at <a href=\"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/\">the accounting formula<\/a> in reverse.<\/p>\n\n\n\n<p><strong>Owner\u2019s Equity = Assets &#8211; Liabilities<\/strong><\/p>\n\n\n\n<p>Another way to phrase this is:<\/p>\n\n\n\n<p><strong>Owner\u2019s Equity = Net Assets<\/strong><\/p>\n\n\n\n<p>When you\u2019ve paid all your debts, what you have leftover is the owner\u2019s equity.<\/p>\n\n\n\n<p>Owner\u2019s equity is only used when talking of sole proprietorships. Corporations <a href=\"https:\/\/d3bxy9euw4e147.cloudfront.net\/oscms-prodcms\/media\/documents\/FinancialAccounting-OP_dwsQeqn.pdf\">use<\/a> the term \u201cretained earnings\u201d and partnerships use the term \u201cpartners\u2019 equity.\u201d<\/p>\n\n\n\n<p>But, on a high level, it comes down to the same thing: What\u2019s leftover that the owner(s) can get their hands on after all the chips have fallen!<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_equity_financing\"><\/span>What is equity financing?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<div class=\"wp-block-columns is-layout-flex wp-container-core-columns-is-layout-2 wp-block-columns-is-layout-flex\">\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\">\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"589\" src=\"https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/07\/What-is-equity-financing-1024x589.jpg\" alt=\"What is equity financing\" class=\"wp-image-218696\" srcset=\"https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/07\/What-is-equity-financing-1024x589.jpg 1024w, https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/07\/What-is-equity-financing-300x172.jpg 300w, https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/07\/What-is-equity-financing.jpg 1950w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n\n\n\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\">\n<p>Equity financing is a way for companies to raise money by selling off \u201cpartial ownership\u201d of their company to outside investors.<\/p>\n\n\n\n<p>The term <em>equity financing<\/em> usually refers to companies that are not yet listed on a public stock exchange such as the LSE or the NYSE.<\/p>\n\n\n\n<p>Such companies are called <em>private companies<\/em>.<\/p>\n\n\n\n<p>We explain the term <em>equity financing<\/em> further in the next section.<\/p>\n<\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_private_equity\"><\/span>What is private equity?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Startups\u2014and, in particular, tech startups\u2014usually require a lot of capital to stay competitive and launch their products fast enough. The most popular way to do this is to raise funding. The capital they raise falls under the category of <em>private equity<\/em> and is part of an <em>equity financing<\/em> strategy where funds are raised from outside sources before the company has completed its final product.<\/p>\n\n\n\n<p>Private equity is not listed in a public stock exchange. This has several implications.<\/p>\n\n\n\n<p>The first is that even though investors might be offered \u201cshares,\u201d the concept of these shares works slightly differently to publicly traded shares. Publicly traded shares, which means shares in companies like Google or Apple that you can buy on a public stock exchange, go up and down in price, depending on how the company is doing. When a share goes up, shareholders can sell their existing shares at a profit.<\/p>\n\n\n\n<p>Also, shareholders of public companies can sometimes <a href=\"https:\/\/www.pearlaccountants.com\/brochures\/starting-a-business\/Pearl_Accountants_How_to_start_a_limited_company.pdf\">earn dividends<\/a> from a company\u2019s earnings, although this is not mandatory.<\/p>\n\n\n\n<p>Things don\u2019t work that way with private equity.<\/p>\n\n\n\n<p>It\u2019s true that UK <a href=\"https:\/\/www.pearlaccountants.com\/services\/company-formations\/\">Private Limited Companies<\/a> can also have shareholders and that these shareholders earn dividends, but this is a slightly different concept than that of <em>private equity<\/em> as it is commonly used today.<\/p>\n\n\n\n<p><a href=\"https:\/\/www.pearlaccountants.com\/blogs\/how-to-get-funding-for-your-startup\/\">Investors<\/a> in startups typically invest for the long haul and earn no dividends. Even though they are given a \u201cshare\u201d in the company (i.e. an <em>equity interest<\/em>), these are not publicly traded shares and so one cannot determine if the price of the share is \u201cgoing up\u201d or \u201cgoing down.\u201d Private equity investors usually expect a payout several years down the line, when the startup makes its first <em>Initial Public Offering <\/em>(IPO)\u2014the first sale of shares to the public.<\/p>\n\n\n\n<p>An IPO can raise a tremendous amount of capital for a company, and the initial investors will usually come out in clover after that. By then, the <em>private equity<\/em> game is over and the company is officially a public company, selling its shares in the public stock market.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_a_Debt-to-Equity_DE_Ratio\"><\/span>What is a Debt-to-Equity (D\/E) Ratio?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Equity (stocks and shares) is not the only way a company can raise funds to carry out its duties. The company can also sell \u201cdebt.\u201d<\/p>\n\n\n\n<p>Selling <em>debt<\/em>? How does that work?<\/p>\n\n\n\n<p>It works primarily in the form of <a href=\"https:\/\/www.pearlaccountants.com\/blogs\/getting-an-accountant-to-secure-you-a-loan\/\"><em>loans<\/em><\/a>. And the principle behind it is that the loaned amount will be paid back with interest.<\/p>\n\n\n\n<p>But there are other instruments that can be used to raise capital which is, technically speaking, also debt instruments.<\/p>\n\n\n\n<p>The first of those instruments is called a <em>convertible note<\/em>. This type of debt is usually offered early in the startup\u2019s life. When raising funds from friends and family (or <a href=\"https:\/\/www.pearlaccountants.com\/blogs\/make-a-startup-succeed-in-the-uk\/\">angel investors<\/a>, which are usually also friends and family), the startup will often sell a <em>convertible note<\/em> to them.<\/p>\n\n\n\n<p>A <em>note<\/em> is <a href=\"https:\/\/www.merriam-webster.com\/dictionary\/note\">defined<\/a> as \u201ca written promise to pay a debt\u201d. And a <em>convertible<\/em> note is a type of note that can be <em>converted<\/em> into equity (company stock) later on in the company\u2019s life.<\/p>\n\n\n\n<p>Another form of debt equity is called <em>venture debt<\/em>. This type of debt financing usually occurs when a startup has already made a bit of progress and already has some venture capitalists on board who are putting the pressure on to make the company profitable. When this happens, other investment firms can come along and offer a straight <em>loan<\/em> which they are confident will be paid back with interest because of the other venture capitalists that have an <em>equity interest<\/em> in the company.<\/p>\n\n\n\n<p>There are very many technical terms to describe the types of certificates and\/or bonds the company can issue to acknowledge that it has \u201csold\u201d some debt and that it is committed to paying interest on that debt. But the main point to understand is that private companies can raise capital in two primary ways:<\/p>\n\n\n\n<ul>\n<li>Equity financing<\/li>\n\n\n\n<li>Debt financing<\/li>\n<\/ul>\n\n\n\n<p>The Debt-to-Equity ratio shows how much of a company\u2019s capital has been raised by debt versus equity. A company that has a high D\/E Ratio is said to be \u201chighly geared\u201d or \u201chighly leveraged\u201d.<\/p>\n\n\n\n<p>The D\/E Ratio shows what would happen if debt collectors came calling tomorrow. A high D\/E Ratio is not necessarily a bad thing, depending on the industry. Companies in highly competitive fields would do well to keep the D\/E ratio low, because competition could wipe out gains quickly, forcing debts to be paid. But companies that have a monopoly on services, like telecoms and electricity providers, can operate in a \u201chighly geared\u201d manner because people depend on their services and so must pay for them every month.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_shareholders_equity_ratio\"><\/span>What is shareholders\u2019 equity ratio?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Remember, depending on whether you\u2019re a sole proprietor, small business, or corporation, <em>owner\u2019s equity<\/em> can be expressed differently.<\/p>\n\n\n\n<p>To keep things simple, let\u2019s just say that shareholders\u2019 equity is the same as owner\u2019s equity. Single-person companies can use <em>owner\u2019s equity<\/em> while multi-person companies can use <em>shareholders\u2019 equity<\/em>. (I know, I know, that\u2019s not 100% correct, but we\u2019re just trying to keep things simple.)<\/p>\n\n\n\n<p>And the formula for owner\u2019s equity is:<\/p>\n\n\n\n<p><strong>Equity = Assets &#8211; Liabilities<\/strong><\/p>\n\n\n\n<p>Essentially, the shareholders\u2019 equity <em>ratio<\/em> shows how effective the shareholders\u2019\/owner\u2019s equity has been at generating assets.<\/p>\n\n\n\n<p>The formula for shareholders\u2019 equity ratio is:<\/p>\n\n\n\n<p><strong>Shareholders\u2019 Equity Ratio = Shareholders\u2019 Equity \/ Assets<\/strong><\/p>\n\n\n\n<p>A high ratio shows that a large portion of the company\u2019s assets have been attained through shareholder funds and not through debt financing. If the ratio is low, it shows that the company has used debt, primarily, to generate assets.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_an_equity_market\"><\/span>What is an equity market?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Just like a fish market sells fish and a meat market sells meat, an equity market sells\u2014can you guess?\u2014equity! In other words, it sells <em>stock<\/em>, and the more common term for an equity market is \u201cthe stock market.\u201d<\/p>\n\n\n\n<p>The equity market is made up of <em>exchanges<\/em> and <em>over-the-counter<\/em> (OTC) markets.<\/p>\n\n\n\n<p>An OTC is like a decentralised exchange. It is conducted entirely electronically and without the help of intermediaries such as brokers. Traders buy and sell amongst each other through their computers. One of the key requirements of an OTC market is that it is liquid, meaning that it has sufficient trade volume to carry out trades easily. For example, if someone wants to sell 10,000 shares of XYZ at \u00a35.00 a share (a total of \u00a350,000) but the other buyers in that market rarely buy or sell over 100 shares at a time, then the market is not very liquid and its trading volume will below.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_home_equity\"><\/span>What is home equity?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<div class=\"wp-block-columns is-layout-flex wp-container-core-columns-is-layout-3 wp-block-columns-is-layout-flex\">\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\">\n<p>Just like in investment, equity in real estate means <em>ownership<\/em>.<\/p>\n\n\n\n<p>In real estate, <em>home equity<\/em> means \u201chow much of the home someone actually owns.\u201d That might sound weird if the person has bought the home and it belongs to them. But homes are typically purchased through a home loan, so a home actually belongs to a bank until it is fully paid for.<\/p>\n\n\n\n<p>Let\u2019s say a house costs \u00a3100,000. A new homeowner puts up 20% of the value as a deposit, and then borrows the remaining 80%\u2014or \u00a380,000\u2014from the bank.<\/p>\n\n\n\n<p>The bank is said to have a <em>lien<\/em> on the house in the amount of \u00a380,000.<\/p>\n\n\n\n<p>A <em>lien<\/em> is the right of a creditor (someone <em>lending<\/em> money) to take ownership of property that has been used as collateral for a loan. In our example above, the house has been used as collateral for a loan of \u00a380,000.<\/p>\n<\/div>\n\n\n\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\">\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"752\" src=\"https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2022\/01\/What-is-equity-home-for-your-1024x752.png\" alt=\"What is equity for your home\" class=\"wp-image-218698\" srcset=\"https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2022\/01\/What-is-equity-home-for-your-1024x752.png 1024w, https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2022\/01\/What-is-equity-home-for-your-300x220.png 300w, https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2022\/01\/What-is-equity-home-for-your.png 1463w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n<\/div>\n\n\n\n<p>On the date of purchase, the owner\u2019s <em>home equity<\/em> is \u00a320,000 because that\u2019s the amount of money they put into the purchase\u2014it is how much they <em>actually<\/em> own of that house, 20%<\/p>\n\n\n\n<p>Let\u2019s imagine that the owner pays off \u00a310,000 on the mortgage loan (we\u2019ll skip interest to keep things simple) so that the owner\u2019s total amount invested into the property is now \u00a330,000. Well, if the house\u2019s market value is still \u00a3100,000, then the owner\u2019s home equity is now $30,000.<\/p>\n\n\n\n<p>But, let\u2019s say the house goes up in market value to \u00a3110,000.<\/p>\n\n\n\n<p>The formula for home equity is:<\/p>\n\n\n\n<p><strong>Home Equity = Market Value of House &#8211; Liens<\/strong><\/p>\n\n\n\n<p>The homeowner still owes \u00a370,000 on the house\u2014the bank\u2019s <em>lien<\/em> on the house. And the house is now worth \u00a3110,000. Our equation can be rewritten as:<\/p>\n\n\n\n<p><strong>Home Equity = Market Value of House(\u00a3110,000) &#8211; Liens(\u00a370,000)<\/strong><\/p>\n\n\n\n<p>The homeowner\u2019s <em>home equity<\/em> is now \u00a340,000, even though they have only paid \u00a330,000 for the house.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_a_home_equity_loan\"><\/span>What is a home equity loan?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The tricky thing about home equity is that it isn\u2019t particularly liquid, which means it\u2019s not easily convertible into cash. And, although the house in our example above might have a market value of \u00a3110,000 according to a recent appraisal, it doesn\u2019t guarantee that the house will sell for that much.<\/p>\n\n\n\n<p>But that <em>home equity<\/em> value can nonetheless be used as collateral for a second loan. This second loan is called a <em>home equity loan<\/em> or a <em>second mortgage<\/em>.<\/p>\n\n\n\n<p>By using the <em>home equity<\/em> value as collateral, a person can refinance their existing house or take out a second loan for another house.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"A_summary_of_equity\"><\/span><a><\/a>A summary of equity<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The simplest meaning of equity is <em>ownership<\/em>. Whether in real estate or investment or in your business, when you have equity, you <em>own<\/em> something.<\/p>\n\n\n\n<p>Equity opens the door to numerous ratios and mathematical formulas that finance professionals such as <a href=\"https:\/\/www.pearlaccountants.com\/about\/\">accountants<\/a> can use to determine profitability or viability. These formulas and ratios are sometimes complicated, but the essence of equity isn\u2019t.<\/p>\n\n\n\n<p>In its simplest form, equity is <em>ownership<\/em>, and whether we\u2019re talking about home equity, owner\u2019s equity, or equity interest, we\u2019re essentially referring to how much that entity <em>owns<\/em> of the item being discussed.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Perhaps no word elicits more confusion in the financial world than \u201cequity.\u201d Although the dictionary has several specific meanings for the word, those meanings have changed and morphed. Equity means one thing in accounting, something different in the stock market, and also something else in real estate! In this article, we\u2019re going to take a <a href=\"https:\/\/www.pearlaccountants.com\/blogs\/what-is-equity\/\" class=\"more-link\">&#8230;<span class=\"screen-reader-text\">  What Is Equity? Every Finance Definition of Equity under the Sun!<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":219551,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[2208,2195,2198],"tags":[],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>What Is Equity: Every Finance Definition of Equity under the Sun!<\/title>\n<meta name=\"description\" content=\"The meaning of equity gets complicated in financial circles. We have provided this guide to offer a simple explanation of what equity is in investment, accounting, and homeownership.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/what-is-equity\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What Is Equity? Every Finance Definition of Equity under the Sun!\" \/>\n<meta property=\"og:description\" content=\"The meaning of equity gets complicated in financial circles. 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