What is equity?
Equity is quite a broad term and has a number of applications in finance. Primarily it refers to a shareholder’s size of ownership in a company and the value of the shares if they were sold off once any debts are paid off. Equity can also refer to stocks that are held by an investor, as well as the percentage a homeowner owns in their house versus that owned by their mortgage provider.
Equity prices for publicly traded companies are determined by the stock market, however in the case of companies that have not gone public, other means are used to evaluate a company’s share price. This is called private equity and is worked out based on the revenue, assets, growth and debt levels of the company. When a deal is being negotiated for fundraising, it is common practice for investors to take a look at the company’s books to see if they think the floated equity price by the seller is fair. This is known as due diligence.