Equity is the portion of a business that belongs to its owners. If you hold a company’s shares, you own equity in it. On a balance sheet, equity is the residual value left after subtracting liabilities from assets.
Traders also use equity as shorthand for shares as an asset class, as in “equities rallied”. And on a trading account, equity can mean your account value after open profit and loss. The context tells you which meaning applies.
What equity means on a balance sheet
Shareholders’ equity, sometimes called shareholders’ funds, is the book value of owners’ interest in a company. The basic equation is simple: assets minus liabilities equals equity. If a company has total assets of £500 million and total liabilities of £350 million, its shareholders’ equity is £150 million.
Under common accounting frameworks, equity is made up of items such as:
- Share capital: the nominal value of issued shares.
- Share premium or additional paid-in capital: amounts paid above nominal value when shares were issued.
- Retained earnings: cumulative profits kept in the business rather than paid out as dividends.
- Reserves: for example revaluation or foreign currency translation reserves.
- Treasury shares: shares the company has repurchased, shown as a deduction.
- Non‑controlling interest: the equity in subsidiaries not owned by the parent, shown within total equity on consolidation.
Book equity is an accounting measure. It rarely matches the market value of equity, which is the share price multiplied by the number of shares. A business with valuable brands can have modest book equity but a large market capitalisation. The reverse also happens if assets later prove overstated.
Negative equity occurs when liabilities exceed assets. That can reflect accumulated losses, asset write downs, or heavy borrowing. It does not automatically mean insolvency, but it can restrict dividends and financing options.
Equity as shares: rights, returns and risks
Owning equity via shares gives you a claim on a company’s profits and net assets after creditors are paid. Shareholders usually have voting rights on major decisions and elect the board. In return for taking more risk than lenders, they seek higher long term returns.
There are two main ways equity holders make money:
- Capital growth: the share price rises if investors expect higher future profits or the company buys back shares.
- Income: companies may pay dividends out of profits.
Performance is often tracked using earnings per share and return on equity. Both relate profits to the share base. New share issues or share option exercises can dilute each investor’s slice of the pie, which is why companies disclose basic and diluted EPS.
Equity sits below debt in the capital structure. In a liquidation, creditors and bondholders are paid first, preferred shareholders next if they exist, with ordinary shareholders last. That subordination is the core trade off in equity investing: uncapped upside over time, with higher short term volatility and a risk of permanent loss if the business fails.
Equities as an asset class in portfolios
In market conversation, equities simply means listed shares. Investors buy individual stocks or use funds and index trackers that mirror markets such as the FTSE 100 or S&P 500. Sector, country and factor exposures shape risk and return.
Equities tend to be more volatile than high grade bonds over short horizons, but have historically offered a return premium over long periods. That premium is not guaranteed. Company fundamentals, valuations, interest rates and sentiment all influence equity prices.
Public equity differs from private equity. Public equity is traded on exchanges, with continuous pricing and liquidity. Private equity involves buying stakes in unlisted companies, then aiming to improve and exit them later. Both are ownership capital, yet the risk, time horizon and governance involvement differ.
There is also a wide ecosystem around equities: stock lending, short selling, and equity derivatives such as options and futures that allow hedging or leverage. The exact features and risks vary by product and provider.
Account equity in trading and how margin affects it
On a brokerage or CFD platform, equity often means the real time value of your account: cash plus or minus unrealised profit and loss on open positions. It is a key number for margin trading because it determines how much buffer you have against losses.
Example: you deposit £5,000. You open a long position that requires £1,000 initial margin. If your open P&L shows a £300 gain, account equity is £5,300. If the market moves against you and the open P&L shows a £900 loss, equity is £4,100. Should equity fall below maintenance thresholds, you may face a margin call or forced position reduction. The precise calculations and thresholds vary by provider and product type.
Some platforms show “free equity” or “available to trade”, which is account equity minus margin currently used. That figure fluctuates with price moves even if you do nothing.
Other uses: home equity and employee equity
Outside company finance and trading, equity commonly appears in two places:
- Home equity: the value of a property minus the outstanding mortgage. If a home is worth £300,000 and the mortgage balance is £200,000, home equity is £100,000. Falling prices or high borrowing can create negative equity.
- Employee equity: compensation paid in shares or options. It aligns staff with shareholders, but can dilute existing holders when options vest and convert into shares.
Common comparisons and how to interpret equity figures
Equity vs debt: debt is capital that must be repaid with interest on set terms. Equity has no fixed repayments, absorbs losses first and controls the company through voting rights.
Equity value vs enterprise value: equity value is the market value of shareholders’ stake. Enterprise value adjusts for net debt and other claims to show the value of the whole operating business regardless of capital structure. Analysts switch between them depending on which metric they compare to cash flow or earnings.
Price to book: this compares market value of equity with book equity. Capital light, brand heavy or software businesses often trade above book. Asset heavy firms can trade near or below book, especially when returns on those assets are weak. Neither outcome is automatically cheap or expensive without context.
Equity numbers also reflect accounting judgements. Intangibles, impairments and pension assumptions can move book values meaningfully. When analysing a company, look at the composition and quality of equity, not just the total.