In the financial markets, equity means the stock or security of a company representing the ownership in the company. It is basically the funds contributed by the owners of the company. In a balance sheet, the retained earnings of the company are added to the equity portion and this is known as shareholder’s equity.
Equity represents the value of investment by an investor in a company. Any gain in the value of the equity held by the investor will result in capital gains and returns can also be in the form of dividends. However a decline in the value of equity can give a capital loss. Holding equity in a company also gives the shareholder a right to vote in the company’s decisions. These rights give the incentive to the shareholder to keep their interest in the company and hold its equity.
In most cases the retained earnings can exceed the equity capital of the company and form a major part of the shareholder’s funds. This helps to grow the investor’s confidence in the equity held by him/her. Equity is also one of the most important metric to determine how much the shareholders would receive if the company is liquidated at the present date. It helps to analyze the company’s financial health by comparing it to debt known as debt equity ratio and various other ways like return on equity etc.
Example of Equity:
If someone owns 100 shares of Maruti Suzuki, he /she is a shareholder of that company and is holding equity of that company. He /she has the right to get dividends declared by the company, attend Annual General Meeting (AGM) and vote at the same in addition to gaining or losing from the movement in the share prices of the company.
Also, as of 31-3-18, equity of Maruti stood at Rs. 151 crore. Since face value of each share is Rs. 5, Maruti has 30.2 crore outstanding equity shares.