Equity Explained – What You Need to Know

Millennial Magazine - equity explained

There can be no doubt that the UK stock market remains huge business in 2022, with the total market capitalization value of all companies trading on the London Stock Exchange estimated at a staggering £3.9 trillion.

This market is driven through the procurement and sale of company stocks, which primarily represent equity shares within individual businesses (these can be traded on the secondary stock market).

But what do we mean by equity, and how exactly does this concept work? Let’s find out in the article below! This is equity explained.

What is Equity?

While equity shares aren’t the only type of shares issued in the financial marketplace, they represent the overwhelming majority of assets within this space.

But what do we mean by equity? In general terms, this describes the value attributable to the owners of a business, while it’s primarily measured for accounting purposes by subtracting liabilities from the value of total assets.

More specifically, however, equity refers to the ownership of assets that may have debts or similar liabilities attached to them, while this is commonly sold and issued through shares as a way of raising money for a particular business.

There are two primary types of equity value, referred to book and market value. The book value refers to the accounting elements of equity, as it’s calculated as the difference between assets and liabilities on a particular company’s balance sheet.

Conversely, the market value of equity is based on the business’s existing share price (if the firm is public). If not, this value can be determined by investors or valuation professionals, based on expert consultation and the findings of detailed internal audits.

OK – So How Does Equity Work?

From an investor respective, equity is issued in the form of shares, which can be presented differently depending on the status, scale and nature of a business.

Shares can be issued to friends and family by startups, for example, in order to create a more flexible and affordable business model. Larger, mid-cap firms could also issue stocks to employees, while huge corporates often issue equity through a relevant stock exchange at the live market value over time.

The equity procured by shareholders effectively represents the value that would be returned if a business’s assets were liquidated, and all of the associated debts were paid off.

In this scenario, we may also view equity as a degree of residual ownership in a particular business, once again after subtracting the value of relevant debts and liabilities.

Once shares are issued and sold, they’re formally recognized and identifiable on a business’s balance sheet, creating transparency for all parties involved. This will also track the rise or depreciation in the value of equity, depending on the performance of the asset in question and its ability to achieve a profit.

What do you think?

Written by JR Dominguez

JR Dominguez is the technology, finance and music editor for MiLLENNiAL. When he's not writing, you can find him day-trading stocks, playing video games, or composing commercial scores.

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