Equity: Meaning, Definition, and Types

What is Equity? Market Value, Book Value

In simplest terms, equity meaning involves ownership in an organisation. As corporations issue shares in the secondary market to raise capital, investors provide the required finance through those shares.

As a result, they gain ownership in a company proportionate to the number of shares they have invested in. 

However, equity refers to the monetary compensation that shareholders will receive in case an organisation decides to liquidate its assets. Therefore, equity is primarily the difference between total assets and total liabilities of a company.

In addition, equity also indicates the financial performance and health of a company. It is an important marker that investors use before investing their capital in any corporation. 

What is the Definition of Equity? 

Equity definition is mainly the value of an asset that an investor invests in after all its associated debts are cleared. Therefore, one can relate equity to ownership of the asset that an investor acquires through buying shares of a corporation. Besides, it is a marker of the stake of an individual in an organisation’s assets. 

The simplified formula that denotes equity definition accounting of a company is – 

Shareholders’ equity = Total assets of a company – Total liabilities of a company. 

For example, let’s consider that a company XYZ issues shares in the stock market. Through the equity balance sheet of XYZ, it is clear to investors that it has a total asset of Rs.200. On the other hand, investors have the knowledge that the total liability of XYZ is Rs.125. Therefore, equity of XYZ is Rs.75.

As a result, the shareholders of XYZ have claims to Rs.75, which is the value of that company. 

What Does Brand Equity Mean? 

Brand equity definition is essentially an improvement upon the original definition of equity and contains several factors. Companies usually rely on consumer perception and the value of their commodities to determine equity. 

Therefore, students who want us to define brand equity should know that it is the value that a company generates. For instance, let’s get back to the example of company XYZ. Consider that it produces a very popular product that is easily recognisable and distinguishable among its competitor products. 

As a result, the additional value that XYZ generated from the premium product is the brand equity meaning. Therefore, consumers are likely to buy quality products at a higher price than from different companies. The excess value that XYZ creates typically refers to brand equity. 

However, there are several types of equity that students should keep in mind to understand the nature of equity investment. 

What are the Types of Equity? 

As we now know, equity is primarily the difference between the total assets and total liabilities of a business organisation. Therefore, it is mainly the figure that remains from the subtraction of current/non-current assets and current/non-current liabilities. 

Moreover, equity can be classified into the types as stated below – 

• Book Value – The book value of equity mainly refers to the accounting perception of equity. This typically relates to the figure that accountants of a firm derive from balance sheet calculations. Therefore, book value deals with equity that is reflected on an organisation’s financial statement. 

First of all, book value considers current and non-current assets and liabilities. For instance, a company’s assets are cash, inventory, prepaid expenses, and fixed assets. Additionally, it also includes accounts receivable, intellectual property, and intangible assets. Besides, book value also takes into account the current and non-current liabilities. These mainly involve credit, short-term and long-term debt, and other fixed financial obligations. 

For example, let’s assume that Big Bazaar has a shareholders’ equity of Rs.1,000. On top of that, this company has issued 100 shares in the securities market. Therefore, the book value of equity for Big Bazaar is Rs.10. 

• Market Value – Contrarily, the market value of equity implies the financial aspect of equity in the share market. However, market value of equities differs from book value as the former indicates the present value of equity in the market.

Besides, Market value is heavily influenced by the level of competition and information related to a company’s range of products. Typically, the method to calculate market value of equity involves the multiplication of trading price and number of shares. 

Therefore,

Market Value of Equity = latest share price X outstanding shares in the market. 

Let’s consider that Google has 5,000 outstanding shares in the market. An investor Ms. Seema finds that the market price of Google shares is Rs.100. Therefore the market value of equity is Rs.100 X 5,000 = Rs.5,00,000. 

Moreover, market value of equity deals with the financial information currently available to investors. Book value of equity typically deals with financial information from a specific period of time in the past. 

Therefore, both book value and market value of shares reflect the financial condition of a company. On the basis of this information, an investor decides the risk factor of investment in a particular company. As a result, these values send signals to investors as to whether it is financially safe to invest in an organisation. 

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