When an investor’s fund represents
the leftover interest in assets of an organization, which has been spread
amongst individual shareholders of common or preferred stock, is known as
equity. Whenever a business is setup, its owners invest some funds in the
business to finance its day-to-day operations. This creates a liability on the
business in the form of capital because the business has a separate identity
from its owner’s altogether.
Business, for the purpose of
accounting, is considered as a sum of liability and asset. This is also known
as the accounting equation. After all the liabilities have been accounted for,
the positive remainder is used by the owner’s interest in the business.
This definition is useful in the
understanding of the liquidation process in case of bankruptcy. Initially, all
the secured creditors are paid against the proceeds from the assets. Thereafter
a series of creditors who are ranked in the sequence of their priority have the
next claim or rights on the residual proceeds.
The ownership equity is the last
or residual claim against these assets which are paid only after all other
creditors are paid to. Normally in such cases where creditors even cannot hold
enough money to pay their bills, not even to reimumbrse the owner’s equity.
Therefore the owner’s equity is
reduced to zero or negligible. The ownership equity is also popularly known as
a risk capital or liable capital.
When an individual or a firm buy
and hold shares of a particular stock in a stock market, it is known as equity
investment. They do so in anticipation of income from various dividends and
capital gains as the value of the share increases. Equity holders receive
voting rights, to exercise their vote on candidates for board of directors in
the company they have a stake in. They can also allow certain major
transactions and residual rights that they share in the company’s profits as
well as in recovering some part of the company’s assets in the event that it
folds, though they generally have the lowest and backward priority while recovering
their investment. This also means that the acquisition of equity
participation in a private limited company or a startup company.
When investment is made in an
infant company, it is known as a venture capital investment and is generally
regarded as a high risk than investing in listed concerned situations. These
equities which are held by private individuals are often known as mutual funds
or other forms of collective investment schemes, many of which have its prices
quoted and listed in financial newspapers or magazines.
These mutual funds are managed
typically by prominent fund management firms. Such holdings allow various
individual investors to get a variety of funds and get the skill of the
professional fund managers in charge of the funds. As an alternative, which is
generally followed by large investors and pension funds, they hold shares
directly in an institutional environment.
Many clients who hold their own
portfolios are known as segregated funds which in contrary are the pooled
mutual fund alternatives.
