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 sales 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.
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What Is Equity?
Features of Equity Investing
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Benefits of investing in Equity:
Potential for Profit: The potential for profit is greater in equity share than in any other investment security. Current dividend yield may be low but potential capital gain is great. The total yield or yields to maturity may be substantial over a period of time.
Limited Liability : In the corporate form of an organisation, its owners have, generally, limited liability. Equity Share is usually fully paid. Shareholders may lose their investment, but no more. They are not further liable for any failure on the part of the corporation to meet its obligation.
Hedge against Inflation : The equity share is a good hedge against inflation though it does not fully compensate for the declining purchasing power as it is subject to the money-rate risk. But, when interest rates are high, shares tend to be less attractive, and prices tend to be depressed.
Free Transferability : The owner of shares has the right to transfer his interest to someone else. The buyer should ensure that the issuing corporation transfers the ownership on its books so that dividends, voting rights, and other privileges will accrue to the new owner. Although the individual has the right to sell his shares, there is little or no trading in the shares of many corporations due to the lack of interested buyers. For this reason, equity shares of many small businesses are nonliquid and difficult to market.
Share in the Growth : The major advantage of investment in equity shares is its ability to increase in value by sharing in the growth of company profits over the long run.
Tax Advantages : Equity shares also offer tax advantages to the investor. The larger yield on equity shares results from an increase in principal or capital gains, which are taxed at lower rate than other incomes in most of the countries.
Asset allocation stabilities your risk and reward by allocating your assets
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Financial instrument that holds some type of monetary value
Getting the shares of a private corporation to the public in a new stock issuance
Importance of Equity
Equity is an important concept in finance that has different specific meanings depending on the context. Perhaps the most common type of equity is “shareholders’ equity,” which is calculated by taking a company’s total assets and subtracting its total liabilities. Shareholders’ equity is, therefore, essentially the net worth of a corporation. If the company were to liquidate, shareholders’ equity is the amount of money that would theoretically be received by its shareholders. Other terms that are sometimes used to describe this concept include shareholders’ equity, book value, and net asset value. Depending on the context, the precise meanings of these terms may differ, but generally speaking, they refer to the value of an investment that would be left over after paying off all of the liabilities associated with that investment. This term is also used in real estate investing to refer to the difference between a property’s fair market value and the outstanding value of its mortgage loan.
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