What Is Equity?
Equity is simply the part you own. If you buy a house for ₦50 million with a ₦30 million mortgage, your equity is the ₦20 million that is truly yours. A company works the same way: whatever is left after everything it owes has been paid belongs to its owners — the shareholders. Buying shares is buying equity.
Equity. Equity is ownership. In investing, equity is the ownership stake shareholders hold in a company; "equities" is the name for shares as an asset class, as distinct from fixed income, which is money lent rather than owned.
Equities versus fixed income
Investors divide most of what they own into two families. Fixed income — Federal Government bonds, treasury bills, commercial paper, fixed deposits — is money you lend: you are promised a set interest payment and your money back at the end, and you do not share in the borrower's growth. Equities are money you own: there is no promised payment and no guaranteed return of your capital, but you share in whatever the business becomes. That trade-off — certainty against participation — is the central decision in building a portfolio.
Why equity carries more risk and more potential
If a company runs into trouble, its lenders are paid before its owners. Shareholders stand last in the queue, which is why equity is riskier than fixed income issued by the same company. The reward for standing last is that there is no ceiling: if the business grows, all of that growth belongs to the owners, while the lenders only ever receive their agreed interest. Over long periods, that is why equities have tended to outpace fixed income — and over short periods, why they can fall further.
Shareholders' equity on a balance sheet
In a company's annual report, "total equity" or "shareholders' funds" is what is left when you subtract everything the company owes from everything it owns. It is an accounting figure, not the market value: a company's shares can trade well above or below its book equity. Dividing total equity by the number of shares in issue gives book value per share, one of the figures investors compare with the share price.
Listed and private equity
Shares in companies on the Nigerian Exchange are listed equity: priced every trading day and possible to sell through a stockbroker. Private equity is ownership in companies that are not listed — it usually cannot be sold quickly and is valued only occasionally. Most individual investors hold listed equity, either directly as shares in their own name or indirectly through funds and exchange-traded funds.
How much equity is right
There is no single answer. The share of your wealth held in equities normally depends on how long you can leave the money alone, how you would cope with a fall in its value, and what else you own. Money needed within a year or two usually belongs in fixed income or cash; money for goals many years away is where equities have historically done their work. A regulated financial adviser can help you set a mix for your own circumstances.
Questions
About equity
This page is for general information and educational purposes only. It does not constitute financial advice, investment advice, or any recommendation to buy, sell, or hold any security. The value of investments can fall as well as rise, and you may get back less than you invest. Shares Saver does not provide financial advice.
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