What is Equity?
Equity is the total value of a company which shareholders is entitled to get if all debts of a company are paid off, with its properties liquidated. It is the cost of an enterprise less any liabilities payable by the corporate in the case of acquisition. Furthermore, shareholder equity may be used to represent a company's book value. In a balance sheet, equity is the shareholder’s stake mentioned in the liabilities and Stockholders’ Equity section.
Equity may be used as a form of payment-in-kind. It also represents a company's pro-rata ownership of its shares.
How do you Calculate Equity?
Equity can be calculated by subtracting a company's total liabilities from its total assets.
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One can find the value of total assets and total liabilities of a company, reported separately, on the consolidated balance sheet of a company. Then, one can calculate shareholder equity by subtracting gross liabilities from total assets.
What are the types of Equity?
Equity is the value assigned to shareholders of a business. A business can sell its equity for acquiring cash which can be used either to start up new or expand the existing operations.
The two types of equity shares sold by the companies are Common Equity and Preferred Equity.
Common Equity: Common stockholders are usually assigned voting rights and holders are entitled to profits through dividends through they rank last for distribution by the company.
Preferred Equity: Less volatile and having lesser potential for profit than common stock, preferred stock usually receives pre-defined dividend.
Why Equity is important?
Equity helps investors determine a firm’s financial health. Equity is used to calculate many financial ratios. However, without the use of other instruments and indicators, shareholder equity itself is not a reliable measure to determine financial health of a company.
Corporations raises money in the form of Equity to buy properties, invest in ventures, and finance operations. A company raises capital through debt including loans or bonds or through equity i.e. by issuing stocks. Equity investments are preferred by investors because they allow them to participate more fully in a company's income and growth.
Shareholders of a company benefit from capital gains as well as from dividends. Shareholders who own stocks will be able to vote on corporate decisions as well as board of director elections. This stock ownership encourages shareholders to remain invested in the company.
After buying a stock in a business, a person becomes its partial owner.
Why should people invest in Equities?
Individuals prefer to invest in equity shares because they have a high rate of return. Despite their potential for high returns, they expose an individual's investment portfolio to some risk. As a result, before deciding to invest in the equity stock, individuals should determine their risk appetite.
What are the advantages of Equity Shares?
Everything has its own benefits, so do equity shares too. Let’s talk about some of them:
What are the disadvantages of Equity Shares
If one gets higher benefits, it is obvious that he/she has to accept some disadvantages too. These include: