What is Equity?

Nav.igating Business Ownership

By Emily Elmore | 21 May 2020

As we talk about career pivots, salary + benefits negotiation, and starting your own business, one of the financial terms you’re likely to encounter is “equity.” What exactly is equity? There are various types, but equity is ownership. It’s important to know the context in which equity is being applied in order to determine the correct definition.

1. Equity as Corporate Stock

Equities are securities that confer an ownership stake to the holder. If you purchase, say, 1,000 shares of Apple Inc., you can claim you own a (very small) piece of the tech giant. If you hear someone talking about their “equity portfolio,” they’re talking about their stock holdings.

2. Home Equity

Another type of equity many of us are familiar with is real estate, where equity is the difference between what you owe on your mortgage and what your home is worth. For example, let’s say my home’s market value is $200,000 and I owe $185,000 on the mortgage; I have $15,000 of equity. As you grow this value, you may choose to borrow against it for home repairs or to fund education or retirement.

3. Private Equity

This refers to business ownership, but it’s structured differently than shares of common or preferred stock. If someone talks about their private equity holdings, it usually means they have a stake in a limited partnership or some other legal entity that is run by a private equity manager.

4. Equity as an Accounting Value

For some businesses, “equity” refers to the broad concept of ownership that equates to a balance sheet accounting value. Equity is not considered an asset or a liability on a company’s financial statements. Equity is what you get when you subtract liabilities from assets.If the amount is negative, then the owner(s) or shareholders have no equity in the business, and the company is considered to be “in the red”. Equity in a company may include tangible assets (assets in physical form) and intangible assets.

Examples of Tangible Assets

Cash
Buildings
Equipment

Examples of Intangible Assets

Copyrights
Patents
Trademarks

So do you want equity? Yes. Equity is good and you want more of it. While there are plenty of perks to ownership, you may still opt to negotiate for higher cash compensation depending on your financial situation. Whatever you’re considering, we’re here to help you, nav.igator! Check out our salary negotiation tool or talk with our mavens, many of whom own their own businesses and can break equity down further.

Related Reads: