Equity

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What is Equity?

Equity, often referred to as shareholders' equity (or owner's equity for privately held businesses), represents the residual value of a company after all its liabilities have been deducted from its assets. In simpler terms, it's the amount that would be returned to shareholders if all assets were liquidated and debts fully paid.

In the context of an acquisition, equity reflects the value of the company after subtracting any outstanding liabilities not assumed by the buyer.

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Equity also refers to the ownership interest in a business, evaluated as the difference between its total assets and total liabilities — as recorded on the company’s balance sheet. The value of equity can be determined by the market share price or through a professional valuation. This account is commonly referred to as owners’ equity, stockholders' equity, or shareholders’ equity.

Why Invest in Equity?

Investing in equity involves purchasing shares of a company with the expectation that the value of those shares will appreciate over time, leading to capital gains and/or dividend income.

When the value of equity investments increases, investors can benefit by selling their shares at a profit. In case of company liquidation, shareholders may also receive a portion of the residual value once all obligations are settled.

Equities play a vital role in enhancing a portfolio’s asset allocation by offering growth potential and diversification, helping to spread risk and improve long-term returns.