Equity is ownership of assets in a company, typically denoted in shares.
Equity represents the residual interest in the assets of a company after deducting liabilities. It represents the value that would be left over for shareholders if all of the assets were sold and all of the debts were paid off. In contrast, debt represents borrowed money that must be repaid to the lender with interest.
Equity can be calculated by subtracting the company's liabilities from its assets. This results in the shareholder's equity, which represents the value of the company that is owned by the shareholders
Common stock and preferred stock are the two main types of equity. Common stock represents ownership in a company and entitles the holder to voting rights and the potential to receive dividends. Preferred stock is a hybrid of debt and common stock, and typically has a higher claim on assets and earnings than common stock but no voting rights.
When a company issues new equity, it dilutes the ownership stake of existing shareholders, but it also raises capital for the company. This can affect a company's financial statements by increasing the amount of assets and equity, but also by increasing the number of shares outstanding.
Equity affects a company's valuation by representing a portion of the company's ownership and assets. A company with a high level of equity relative to debt is generally considered to be more valuable and less risky than a company with a high level of debt.
A company's equity position is an important factor in determining its creditworthiness because equity represents a cushion of assets that can be used to pay off debts in the event of financial difficulties. Generally, the more equity a company has, the more creditworthy it is considered to be.