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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).
