Equity in Canada

Equity is the monetary value of a business or property, beyond any liens or related debts. The term generally refers to “shareholders’ equity.” Shareholders’ equity is an ideal figure that stands for the amount of money that shareholders would get if the company liquidated its assets and paid its debts. In informal usage, the term equities has evolved to mean publicly traded stocks.

Equity is the monetary value of a business or property, beyond any liens or related debts. The term generally refers to “shareholders’ equity.” Shareholders’ equity is an ideal figure that stands for the amount of money that shareholders would get if the company liquidated its assets and paid its debts. In informal usage, the term equities has evolved to mean publicly traded stocks.


In accounting, equity appears on the right-hand side of companies’ balance sheets. Equity in this context generally means the book value of the amount that investors put into the company plus its retained earnings. Equity is calculated by subtracting the company’s debts from its total assets, following the typical balance sheet equation:

Assets = Liabilities (or Debts) + Owner’s Equity (or Capital)


In practice, the book (or stated) value of a company’s shareholders’ equity is often misleading. Assets are generally listed at their historical cost, less depreciation. They may thus be worth much more (as in the case of a building that was purchased years ago but which has risen in value). In certain cases, they may be worth much less (as in the case of certain US bank assets following the 2008 financial crisis).


Key Terms: Equity

Book value

The value of an asset as entered in a company’s records. Book value is distinct from market value, which depends on the price consumers are willing to pay for the asset.

Depreciation

A decrease in value (e.g., due to wear and tear of a property).

Lien

A right over a property, held as a guarantee on a debt. For example, someone might buy a car with a loan from a bank on the condition that they grant the bank a lien over the car. The lien would allow the bank to take the car and sell it if the buyer fails to repay the loan.

Liquidate

To convert assets into cash.

Shares (also called “stocks”)

A unit of ownership in a company. Individuals who own shares are called “shareholders.”

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