What is Equity? Meaning, Different Types and Key Features
30 May, 2025
Synopsis
Equity represents the ownership stake that one has in a company.
It plays a critical role in business finance, investments and wealth creation.
Understanding the types of equity, how it’s calculated, and its features can help individuals and businesses make informed financial decisions.
Equity represents ownership—whether in a company or in an asset. In simple terms, book value of equity is the value that remains after subtracting liabilities from total assets. For businesses, book value of equity refers to the amount that would be returned to shareholders if all assets were liquidated and debts repaid.
From an accounting standpoint, equity is calculated using the formula:
Equity = Assets – Liabilities
This formula applies whether you're evaluating a company’s balance sheet or assessing your own financial position. Understanding this foundational concept is essential for making informed decisions across investing, business financing, and wealth planning.
Meaning of Equity in Stock Market
In finance, equity refers to ownership in a business. If you own shares in a company, you own part of that company. These shares are called equity shares. Businesses raise capital by offering these shares to investors, who in turn expect returns in the form of dividends and capital appreciation.
Shareholder equity is an important financial indicator used by analysts to assess the financial strength of a business. It reflects the company’s retained earnings, paid-up capital, and reserves.
Features of Equity
Some key characteristics that define equity in finance include:
Ownership: Equity represents ownership in a business.
Residual Claim: Shareholders receive returns after all debts are paid.
Voting Rights: Equity shareholders often have voting power in company decisions.
Dividends: Companies may share profits with equity shareholders, though it’s not guaranteed.
Types of Equity
Equity can take several forms, depending on the context:
Shareholder Equity: The owner’s claim in a company after all liabilities are settled.
Private Equity: Investment in unlisted companies through venture capital or buyouts.
Equity Mutual Funds: Investment vehicles that pool money to buy shares of listed companies.
Home Equity: The value of an individual's ownership in their house, calculated as property value minus outstanding mortgage.
Calculating Equity Shares
In the context of businesses, equity shares are the most common form of equity. They represent ownership units in a company.
There is no single formula to value equity shares, but some commonly used methods include:
Net Asset Value (NAV) = (Total Assets – Total Liabilities) ÷ Number of Outstanding Shares
Market Capitalisation = Current Share Price × Total Number of Shares
How Shareholder Equity Works
Shareholder equity may grow if a company retains higher portion of profits and invests these profits back in the business to grow it.
For example, if a company has ₹500 Crore in assets and ₹300 Crore in liabilities, its shareholder equity is ₹200 crore. This represents the collective ownership value of all equity shareholders.
Benefits of Equity Investing
Investing in equity shares and equity mutual funds can be highly rewarding. Some key benefits include:
Ownership and Wealth Creation: Equity offers a share in the company’s success.
Inflation-Beating Returns: Historically, equities have outperformed most other asset classes in the long term.
Dividend Income: Some stocks offer regular dividends as additional income.
Liquidity: Listed equity shares are easily traded on stock exchanges.
Diversification: Through equity mutual funds, investors can access a broad portfolio with lower entry capital.
Factors to Consider While Investing in Equity
Equity investing also comes with risks. Here are a few things to consider:
Volatility: Share prices can fluctuate based on market, economic, and company-specific factors.
Market Timing: Trying to time entry and exit can lead to poor outcomes.
Equity Dilution: When a company issues new shares, existing shareholders' ownership gets diluted.
Management Risk: A company’s performance is directly affected by the decisions of its leadership.
Explore Equity Investments with Confidence
Use HDFC Bank’s InvestRight platform to access research insights, compare equity mutual funds, and make informed investment choices—all in one place.
Understanding equity is fundamental to understanding the financial world—whether you’re investing in the stock market, building a company, or managing personal wealth. From equity shares to equity mutual funds, the concept spans many areas, but the core idea remains the same- ownership and value.
As you consider investing or evaluating businesses, knowing the meaning of, types of equity, and how to calculate it will empower you to make smarter, more confident decisions.
FAQs
What is the difference between equity and debt?
Equity is ownership capital, while debt is borrowed capital. Equity holders own a stake in the business and share in profits (and losses), whereas debt holders receive fixed interest payments and must be repaid regardless of company performance.
Why is equity important for businesses?
Equity provides long-term capital without repayment pressure. It improves a company's financial stability and creditworthiness and allows businesses to raise money without increasing debt.
What affects a company’s equity?
Factors like profits, losses, new equity issuance, share buybacks, and dividend payouts all impact shareholder equity.
Can equity be negative?
Yes. If liabilities exceed assets, the equity becomes negative—indicating financial distress or insolvency.
What is equity dilution?
Equity dilution occurs when a company issues new shares, reducing the ownership percentage of existing shareholders.
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*Disclaimer: Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing.
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