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.
This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. Read more
