Equity
Equity is ownership — the residual value of an asset after subtracting all liabilities. In real estate, it's the difference between your home's market value and your mortgage balance. In business, equity represents shareholders' ownership stake after debts are paid.
Home worth $500,000 with $300,000 mortgage → $200,000 equity. Business with $2M in assets, $800K in debts → $1.2M equity.
The word equity appears in multiple contexts: home equity (home value minus mortgage), stock equity (shares of company ownership), private equity (ownership of non-public companies), and sweat equity (value created through labour rather than cash investment).
When investors talk about the "equity premium," they mean the extra return stocks provide over risk-free bonds — historically about 4–6% per year — as compensation for the volatility and risk of owning businesses rather than lending money.
Building equity in a home is one of the most common paths to wealth for middle-class Americans. Unlike renting, mortgage payments convert to equity (ownership stake), which can be accessed via sale or home equity loan.
Related terms
- Home Equity
- Home equity is the portion of your home's value that you actually own — the market value minus any outstanding mortgage balance. Equity grows as you pay down principal and as the home appreciates.
- Net Worth
- Net worth is the total value of everything you own (assets) minus everything you owe (liabilities). It is the most comprehensive single-number measure of financial health.
- Loan-to-Value Ratio (LTV)
- The loan-to-value (LTV) ratio is the mortgage amount divided by the property's appraised value, expressed as a percentage. An LTV above 80% typically requires private mortgage insurance (PMI) in the US.
- Dividend
- A dividend is a cash payment made by a company to its shareholders, typically quarterly, as a distribution of profits. Dividends provide income without selling shares and are common among mature, profitable companies.