What is Equity?
Imagine a company as a big pie, and equity is a slice of it.
Key Takeaways
Equity refers to various rights and benefits shareholders enjoy in a company.
Equity is also called shareholders' equity, which is calculated by subtracting total liabilities from total assets.
Equity represents a wide range of rights, such as the entitlement to receive dividends, vote, and receive a distribution in liquidation.
Understanding Equity
Equity is the right of shareholders to obtain economic benefits from a company and participate in the company's operation and management.
Equity represents the shareholders' ownership of a company. The ownership ratio determines a shareholder's power in the company's decision-making and how many dividends they can get. If you think of a company as a pie, the equity held by a single shareholder is a slice of it.
In the balance sheet of a listed company, the equity of all shareholders is combined and presented as shareholders' equity. The formula is shareholders' equity = total assets - total liabilities.
For example, for the third quarterly report that ended October 31, 2021, NVIDIA's total assets are $40.6B, whereas the total liabilities are $16.8B, so its shareholders' equity is $40.6B-$16.8B= $23.8B.
Benefits of Equity
Right to receive dividends
The fundamental right of shareholders is to receive dividends according to their stake in a company.
Voting power
Voting power refers to shareholders' rights in decision-making on significant issues of a company. At the same time, shareholders also have the right to elect board members in a joint-stock company.
Entitlement to have a distribution of liquidated assets
Shareholders are entitled to a distribution when a company is liquidated. However, the premise is that the company's assets are more than its liabilities.