What is equity shares definition? Equity shares are the shares joint stock companies issue to the public as the main source of long-term financing. The reason it's referred to as long-term financing is because equity shares are legally not redeemable in nature. Equity share value is stated in terms of the face value of each share, which is also called issue price, par value, book value, or market value. Usually, the asset's value minus liabilities equals the asset's equity value. To shorten this to an equation for accounting purposes, it's Assets-Liabilities=Equity.

Equity as a Share of Ownership

The term equity has more than one possible meaning, depending on how it's used. For example, in the financial sense equity describes how much of an asset each person owns after all debts have been paid and liabilities are subtracted. Another term used with this type of financial equity is preference. Preference indicates which shareholders get paid first, even if the company files bankruptcy. General equity shareholders have the advantage of voting rights, though, and preference shareholders don't get to vote.

Equity in Different Industries

The term equity has slight variations in meaning when used in different industries.

  • For traders, the term equity describes stock. Stock qualifies as equity because the stock is representative of a person's ownership in a company. One advantage of this type of equity is that stock shares typically have no liability attached to them.
  • Equity in the real estate field describes the distance between a specific asset's market value and how much debt is owed on that asset.
  • In investing, a certificate of ownership in a given company represents shares held. This tells how much each investor gets from the company's net profits, and how much claim each investor has over company assets if it should end up in a state of liquidation.

Voting rights are issued to investors, but the liability of each investor is limited to his or her invested amount.

Ownership Interest

Securities and stocks represent an investor's ownership interest. This interest may be in privately held companies. When held by private companies, it's referred to as private equity. The amount of funding provided by a company's owners and shareholders plus the company's retained earnings are referred to as stockholders' equity and shareholders' equity when the balance sheet for the company is prepared. When engaging in margin trading, security values of the margin account for less than the amount the account holder borrowed.

Valuation of Equity

Referring back to the real estate market, the current fair market value of a property minus the amount still owed on the property's mortgage equals the ownership interest. This is how much the owner could expect to get by selling the property and after all liens against the property are paid. This is also called the real property value. Equity is one of the main classes of assets in investment strategy. Fixed-income bonds and cash or cash equivalents are the other classes of assets for investment strategy purposes.

Risk and Return

Asset classes are used when determining how to distribute assets to create the ideal balance of risk and return when setting up an investment portfolio for an investor. During bankruptcy, a business' equity is the leftover money after all the business' creditors have been repaid. This ownership equity can also be called risk capital and liable capital. A business' equity can be determined by its total value. The equity of a business includes the value of:

  • Buildings
  • Land owned by the business
  • Inventory
  • Capital goods
  • Earnings

Subtract the value of liabilities from the total value. Liabilities include:

  • Debts
  • Operating overhead

These asset classes are considered risks for a business because debts must be paid by the business.

Personal Interest of Shareholders

Equity is representative of the actual value of a shareholder's stake in a specific investment. This is because investors have a personal interest in companies that are linked to their personal equity or number of shares they hold in a company. The personal equity is also part of the total equity held by the company, which directly links a shareholder's concern for the success of a company to his or her own interests.

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