Equity is a finance term that has many definitions, depending on the context. It is commonly used to refer to the ownership interest in a business entity such as a company or corporation. Equity in this sense takes on the form of stock. If a corporation files for bankruptcy, equity comes into play; that is, in terms of who gets paid first. What actually happens is that creditors that paid off first, whereas ownership equity takes on a back seat. If there isn’t enough money to pay off everyone, ownership equity becomes zero.
Equity is also used to refer to what is left after the total liabilities of a company are subtracted from the total assets. If the total assets are greater than the total liabilities, then the equity is positive. If the opposite is the case, then you will have negative equity. Under this definition, the equity can also be called by other terms, including shareholders’ equity, stockholders’ equity, shareholders’ funds, shareholders’ capital, net worth, book value, and so on.
Another very common use of equity is in real estate. In this field, equity is used to mean just how much the homeowner really owns his house or property. This is significant especially if the property has a mortgage. Equity, in this sense, is computed by adding up all existing debts against the property (including the remaining mortgage amount) and then subtracting this from the market value of the property. What remains is the equity, which, obviously, everyone wants to be a positive value.
