Equity equates to ownership. It’s the percentage of a business or venture that you own, and is evaluated based upon the following equation:
Equity Value = (% of business owned) * (Price at which % ownership executed)
This is the general equation to quickly evaluate your equity stake in a company.
For public companies on exchanges and also private companies with internal shareholders, equity is usually described as either stocks or warrants. Stocks are the active shares that you have invested in a company, while warrants are options to purchase stocks at a particular execution price. We won’t focus too much on warrants at this point because they usually don’t encompass more than a small percentage of shareholder equity.
Stocks are usually broken down into two categories: common stock and preferred stock. Common stock is the basic % of shares owned of a business and have voting power. Preferred stock, however, has a prioritized dividend payment schedule but has no decision making authority in the business.
Usually, when evaluating shareholder equity in general, you want to analyze retained earnings and contributed / existing capital. Retained earnings are the amount of profit a company makes after accounting for liabilities. Capital is the amount of equity that is injected into a business for use of property, plant, equipment (PPE) and personnel investments, and is calculated after debt.
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