Equity

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1. Law

A legal system that resolves disputes between persons by resort to principles of fairness and justness.


2.

The capital of a firm invested by those accepting the greatest degree of risk, for example the holders of ordinary shares (also known as common stock or common equity) in a company.


3.

Securities representing the rights of the risk capital investors in 2. above.

For example, ordinary shares, also known as common stock.


4. Financial reporting.

Amounts in the financial report of a company representing the book value of the interests of the shareholders in 2. above.

It includes share capital, cumulative retained profits, and other reserves.

It is also known as 'total equity' or 'shareholders' funds'.

The book value of total equity is equal to the book value of the company's net assets.


5. Financial reporting.

Comparable amounts for financial reporting entities that are not companies.


6. Banking and bank regulation.

Abbreviation for common equity.


7.

The net value of an asset, after deducting any debt relating to it or secured on it.

For example, the value of a residential property, after deducting the amount of a mortgage borrowing secured on it.

If the value of the borrowing exceeds the value of the asset, the situation can be described as 'negative equity'.


Example: Equity and Negative equity
A house is worth EUR 400k.
A borrowing of EUR 300k is secured by a mortgage over the house.
The net worth is the difference between the value of the the house (asset) EUR 400k and the borrowing (liability) EUR 300k
400k - 300k = EUR 100k


The Equity in the house is the difference between the current value, and any loans secured over it.
This is also EUR 100k.


If the value of the house falls to EUR 250k, the borrowing now exceeds the value of the asset.
This is 'negative equity' (of EUR 50k = 250k - 300k).


See also