Information in simple English

What is equity?

Equity is a core concept in finance and accounting which has different but specific meanings depending on the given context. When people talk about Equity, they’re often referring to the owner’s stake in a company after deducting the liabilities. On a broader level, Equity can be categorized into two types; book value and market value. 


Book Value Equity

For book value equity, also known as ”owner’s equity”, the company’s balance sheet provides equity insights by calculating the difference between assets and liabilities. While reviewing assets and liabilities on the balance sheet, accountants need to take note of both current and non-current assets, as well as current and non-current liabilities. 


Market Value Equity

Market value equity is also identified as shareholder’s equity or net worth. The term is self-explanatory: if the company’s total assets are sold off in exchange for money, and then the debts are paid off, what remains after that is called market value or shareholders' equity. This same amount of money would be distributed as market value equity amongst the business' shareholders. 

Calculating market value equity becomes tricky while considering the public and private shares. In the case of a publicly-traded company, the calculation model is relatively easy as it only involves the current share value times the outstanding shares. While privately traded companies throw in a hard time estimating their market equity because accounting statements use historical cost data that help investors determine book value. This is followed by an assessment of the future worth of a company in addition to financial analysis's projected performance metrics that allow an investor to assess market value to ascertain a company's enterprise value.