Equity refers to the amount of money that the owner of a company has put into it. It is referred to as Shareholders' Equity for public Ltd companies and Owners' equity for privately held companies. On the balance sheet, equity is represented as the difference between the assets and liabilities of a company. It is a key indicator to establish the financial soundness of the company.
During liquidation, it is the share of money that is paid to the shareholders after liquidating all the assets and paying off all the debts. In the case of a sale or acquisition of a company, equity is the difference between the value of company sales and the liabilities that were not transferred with the sale but were initially a part of the liabilities.
The exact representation of what the company owns vs what it owes is the equity equation or the current situation of the company. The money that a company gets by selling shares is used for investing in projects or to pay the operational costs. This results in the company increasing its assets.
Equity shows the investor's investment in a business based on the number of shares they hold. The stocks held in a company can get the investor capital gains and dividends. Owning equities also gives voting rights to the investors, thereby making them more involved in the company.
Investors are particularly drawn to equity investments as they have the potential to give a better return when the company grows and reaps profits. However, the higher returns of owning equity also comes with higher risks.
Investments in equity do not come with any assurance of returns. The returns on equities depend on the performance of the underlying assets.
The capital contribution made by the shareholder is referred to as the common stock. The shares denote the shareholdersâ remaining claim on the assets of a company as well as their right to vote.
This kind of equity account has no voting rights but enjoys an assured cumulative return.
The part of net earnings that is not paid as dividends is called retained earning. This is either reinvested into the company or used to pay off future liabilities.
Also known as the Additional Paid Up Capital, this includes anything paid by the shareholders over and above the par- value of the shares.
As the name denotes, this is a contra equity account that denotes the amount of the common stock that has been bought back from the shareholders. In the books of accounts it is shown as a deduction from the total equity.
This denotes the unrealized income and is deducted from the net income in the statement of incomes in the books of account.
Investment into equity comes with the potential of high returns. If you are someone who has a moderate to high risk appetite then you can consider investments into equity. Also if the time period available to you is 7 to 10 years to create a sizable corpus, then returns from equity may be able to give you the boosted returns. However, there is no assurance of high returns on equity investments and you should consult your financial advisor ot Mutual Fund distributor to suggest to you the best investment options for your goals.
