Definition of Equity
Equity means the owner’s claim in a business’s net assets. The business needs resources such as cash, vehicles, building, etc. So there are two sources of raising resources, first through borrowing from a bank, or other sources. This source is called debt. The other option is through raising equity shares by offering the general public a right to participate in the net assets of the company.
Example of Equity:
Assume that a company needs $100 million to start the business. The company goes public on the stock exchange and issued $40 million of bonds to raise $40 million of debt. It also issued $60 million worth of shares to raise the remaining funds.
Equity = Total Assets – Total Debt
Equity = $100 million - $40 million = $60 million