What is Equity?

Equity is ownership, or more specifically, the value of an ownership stake after subtracting for any liabilities (meaning debts). For example, if your home (an asset) is worth $500,000 and you have an outstanding mortgage (a liability) of $400,000, you have $100,000 equity in your home. In other words, equity is the theoretical cash you'd get in your pocket if you completely liquidated an asset less any applicable costs and liabilities. That asset could be a car, a home, a business, or something else.

Equity comes in several forms, and the words "equity" or "equities" can be used in a few ways. Here are some of the ways you might encounter the term in the investing and financial worlds:

• Equities: This word can be used as a synonym for stocks, or for a specific company's stock. Remember that "equity" describes ownership, and stocks are essentially small positions of ownership in a company.
• Home equity: This is the value of your ownership stake in your home. It's sort of like the amount of net worth you have in your home.
• Private equity: Private companies are ones that are owned privately. You can contrast them with public companies, meaning ones with stocks that anyone can buy and sell (i.e., companies that are owned by the public). Ownership in a private company is called "private equity." Some investing vehicles, called "private equity funds" specialize in investing in private companies.
• Shareholder equity (aka owners' equity): This is shareholders', or owners', residual interest in a company after subtracting for its liabilities. It's the value of all the company's assets, minus the value of all the company's liabilities.

While it can be confusing to see or hear the term used in so many ways, always remember that equity is fundamentally about ownership, and the value of ownership.

The value of equity is based primarily on the value of the underlying asset, so it fluctuates. The simplest way to think about equity in any asset is with a single question: "If I sold this asset today and paid off any related debts, how much cash would I have in my pocket?"

Let's look at that example of home equity again. Suppose you buy a home for $500,000, with a $100,000 down payment and a $400,000 mortgage. Your equity is the value of the asset (the $500,000 home) minus the value of any associated liabilities (the $400,000 mortgage). This means, when you first buy it, your equity in the home is $100,000, based on this formula:

Asset – liabilities = equity

$500,000 – $400,000 = $100,000

Now let's suppose that several years later, you've paid down part of the mortgage and now only have $300,000 outstanding. Furthermore, let's suppose that your home has risen in value to $650,000. In that case, your equity in the home would have risen to $350,000, based on this formula:

$650,000 – $300,000 = $350,000

Your equity has increased as the value of your home has risen and as you've paid down the mortgage.

Equity can also be negative. To see how, let's suppose that instead of a $100,000 down payment on that house you were only able to put $50,000 down, and that you took on a $450,000 mortgage. Let's also imagine that shortly after buying the home for $500,000, home prices decline and the value of the home falls to $430,000. In that case, your equity would be negative $20,000, based on this formula:

$430,000 – $450,000 = –$20,000

Having negative equity is not ideal, but it can also reverse itself. For example, if you kept paying your mortgage and waited it out, the home's value might recover and start to rise again. Source