What is Equity?
Equity describes the value of an ownership stake or interest in a property. When a corporation is initially established, owners contribute funds to help finance assets. In exchange for those funds, a liability is created on the corporation to its owners in the form of share capital. The capital that is formed is equity and it represents the sum of the investments made in a corporation – typically in exchange for shares. Equity is also known as risk capital or liable capital.
Shareholders’ equity is the amount of funds that have been contributed by the owners of the corporation, plus any retained earnings that have accumulated. Losses incurred by the corporation will negatively affect shareholders equity since the losses are ultimately the responsibility of the owners. Equity is found on the corporations balance sheet and is an integral element of how a business’s finances are managed and accounted for.
Because equity is inherently risky, equity investors are generally looking for at least a 25% return if not more which is fundamentally the reason why equity capital is considered the most expensive form of capital compared to mezzanine debt.