What is Equity?

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When listening to conversations on financial matters, the term equity is more than likely to come up. Most of us will be very familiar with the term but there is a very good chance that many among us cannot comfortably define it or explain what exactly equity is all about.

The most basic definition of equity is the amount of ownership in an asset after liabilities attached to it have been settled. Both business and personal assets can have liabilities attached to them. When these assets are valued and an amount of their worth identified, the equity of that particular asset is the difference between the valuation amount and the amount in terms of liabilities attached to the asset. Equity increases as the liability reduces, if you own a house for example and there is a mortgage on the house you will increase equity with progressive payment and at the completion of mortgage payment your equity in the property will be at 100%.

It is however important to note that equity similar to other financial factors is subject to market forces and does not remain constant. The equity will be subject to current market prices and may fluctuate as per market forces. Equity could also decline due to the asset depreciating or increase where the asset appreciates. For this reason it is always advisable to get a current valuation on any asset when trying to calculate the equity held in it.

Equity in companies however has a slightly different meaning as it refers to the worth of a company. It an also be taken to be the initial investment made into a business. The business owners will have equity in the form of benefits, rights and interests that can be represented by stocks, capital, options, warrants, partnership interests and other similar things. Incase of a company filing for bankruptcy, owners equity is what remain after creditors are paid. If the amount of money collected from the sale of assets is less than what is owed to creditors, the owner’s equity in the business is zero.

While the term may have slightly varying meaning when applied in investment, accounting and other financial fields, it retains the same basic reference to the amount of ownership minus liabilities. In legal terms however the most common application of equity is when referring to fairness. There very many other applications of the term especially in the legal context that go beyond an expression of fairness.

For most people the issue of equity will usually come up when dealing with a mortgage or remortgage where the financial institution will look at the actual amount of your homes worth that you actually own. The higher your equity the more the amount you can borrow. Most financial institutions will have a limit on the equity you should hold before they can consider your application for financing. Make sure to get the information and work towards achieving the required equity before applying for a loan so as to increase your chances of approval.

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