Equity Investment

An equity investment is money that is invested in a company by purchasing shares of that company in the stock market. These shares are typically traded on a stock exchange.

Why should I consider equities?

Equity investors purchase shares of a company with the expectation that they’ll rise in value in the form of capital gains, and/or generate capital dividends. If an equity investment rises in value, the investor would receive the monetary difference if they sold their shares, or if the company's assets are liquidated and all its obligations are met. Equities can strengthen a portfolio’s asset allocation by adding diversification.

What are the potential benefits of equity investments?

• The main benefit from an equity investment is the possibility to increase the value of the principal amount invested. This comes in the form of capital gains and dividends.
• An equity fund offers investors a diversified investment option typically for a minimum initial investment amount.
• If an investor wanted to achieve the same level of diversification as an equity fund, it would require much more – and much more manual – capital investment.
• Investors may also be able to increase investment through rights shares, should a company wish to raise additional capital in equity markets.

What Is Equity?

Equity, typically referred to as shareholders' equity (or owners' equity for privately held companies), represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company's debt was paid off in the case of liquidation. In the case of acquisition, it is the value of company sale minus any liabilities owed by the company not transferred with the sale. In addition, shareholder equity can represent the book value of a company. Equity can sometimes be offered as payment-in-kind. It also represents the pro-rata ownership of a company's shares.

Equity can be found on a company's balance sheet and is one of the most common pieces of data employed by analysts to assess the financial health of a company.

KEY TAKEAWAYS

• Equity represents the value that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company's debts were paid off.
• We can also think of equity as a degree of residual ownership in a firm or asset after subtracting all debts associated with that asset.
• Equity represents the shareholders’ stake in the company, identified on a company's balance sheet.
• The calculation of equity is a company's total assets minus its total liabilities, and is used in several key financial ratios such as ROE.