Definition
Equity is the residual ownership value of a business or asset after liabilities are subtracted. In markets, the word is also used for the asset class of company shares, as in equity markets or equity funds.
How it works
On a balance sheet, shareholders' equity is total assets minus total liabilities, built from money raised from shareholders plus profits kept in the business. It is an accounting figure and can differ greatly from the value the stock market places on the company.
Equity sits last in the order of claims: lenders are paid interest and principal first, and shareholders receive what remains. That residual claim is why equity can gain more than debt when a business does well and absorb losses first when it does not. In markets the same word also names the asset class of company shares.
Formula / convention
Shareholders' equity = Total assets − Total liabilities
Illustrative example
Illustration with fictional figures: Company A reports total assets of HK$800 million and total liabilities of HK$500 million, so shareholders' equity is HK$300 million. If it earns HK$30 million and keeps all of it, equity rises to HK$330 million; if it instead takes a HK$50 million loss, equity falls to HK$250 million.
What to watch for
Book equity can shrink or even turn negative after accumulated losses or large buybacks, and it is not market value, so it should not be read as the price of the shares. Check whether a source means accounting equity or the asset class.