Equity is the residual value of an asset after all debts against it are paid. In a company, shareholders’ equity is total assets minus total liabilities. In a home, equity is the property’s market value minus the remaining mortgage balance.
On a balance sheet, equity represents the shareholders’ claim on the company’s assets — the portion that belongs to owners rather than creditors.
You’ll hear this when…
Equity has different flavours depending on context. In corporate finance, you’ll hear about shareholders’ equity, equity financing (raising money by selling ownership stakes), and return on equity (ROE), which measures how efficiently a company generates profit from shareholders’ investment.
In startups, “equity” usually means ownership shares. “She took equity instead of a higher salary” means she accepted partial ownership in the company as compensation.
In real estate, “building equity” means paying down a mortgage or benefiting from a property’s rising value — either way, the gap between what you own and what you owe is growing.
Negative equity
Equity can be negative. A company whose liabilities exceed its assets has negative shareholders’ equity. A homeowner whose mortgage is larger than their property’s value is “underwater” — negative equity. Neither situation is immediately catastrophic, but both signal financial stress.
Source: IFRS, IAS 1 — Presentation of Financial Statements