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Glossary

Equity

Equity is an ownership interest in a company, typically held as shares of stock, that entitles the holder to a share of the company's profits and residual assets.

What Is Equity?

Equity is ownership in a company. When you hold equity, you own a slice of the business, usually in the form of common stock or preferred stock. Holders of common stock typically have voting rights on major company matters, though the details vary by share class. In everyday market usage, "equity" is often used as a synonym for stocks. The term also has an accounting meaning, where it refers to the net worth of a company.

On a company's balance sheet, shareholders' equity equals total assets minus total liabilities. This figure represents the value that would theoretically remain for owners if all assets were sold and all debts were repaid. Because it is an accounting measure, it does not always match the price at which the company's shares trade on an exchange.

How Equity Returns Work

Equity holders earn money in two main ways. The first is dividend payments, which are distributions of profit that the company chooses to pay out. The second is capital gains, which occur when shares are sold for more than they cost. Equity holders can also lose money if the share price falls.

Equity sits near the bottom of a company's capital structure. In a liquidation, creditors such as bondholders are generally paid before shareholders, which is why equity is considered a residual claim. This priority gives equity holders the potential for higher returns than bonds over long periods, but it also means they bear more risk. Shareholders of corporations generally have limited liability, meaning they can lose their investment but not more than that.

Why It Matters to Investors

Equity is a central asset class in many portfolios. Investors use it to pursue long-term growth, and they often compare equity returns with those of fixed income investments. Because equity prices can move sharply over short periods, investors frequently weigh their time horizon and their tolerance for losses before deciding how much to allocate to it. Understanding the difference between an equity's market price and its accounting value is a useful starting point for reading a company's financial statements.

Updated October 15, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Balance Sheet

A balance sheet is a financial statement that lists a company's assets, liabilities, and shareholders' equity at a specific point in time, showing what it owns and owes.

Dividend

A dividend is a payment a company makes to its shareholders, usually in cash or additional shares, as a way of distributing part of its profits.

Capital Structure

Capital structure is the mix of debt and equity a company uses to finance its operations and growth, usually expressed as proportions of each type of funding.

Bond

A bond is a loan that an investor makes to a borrower, such as a government or company, in exchange for regular interest payments and the return of the principal at a set maturity date.

Limited Liability

Limited liability is a legal arrangement that caps the financial responsibility of a business's owners at the amount they invested, so creditors generally cannot claim their personal assets.

Fixed Income

Fixed income is a category of investments, such as bonds, that typically pay investors regular interest payments and return the principal at a set maturity date.

Common Stock

Common stock is the most widely issued type of corporate equity, giving holders ownership in a company along with voting rights and a residual claim on its assets and earnings.

Preferred Stock

Preferred stock is a class of corporate ownership that gives holders priority over common shareholders for dividends and asset claims, usually in exchange for fixed payments and limited voting rights.