What is the meaning of finance? There are many financial terms and jargon in the industry of economics which people do not understand. In this article, the meaning of the term "equity" will be discussed to broaden your knowledge of financial terms.
What is equity? Equity can be defined as the monetary value of a property or business beyond any amounts owed on it in mortgages, claims, liens, among others. Over the years, people have carefully avoided tapping into their home equity for unnecessary expenses. Equity can be in cash form (liquid) or in asset form. This is the primary equity meaning.
Why is equity important? You can never have too much of a good thing. The importance of equity is vital to any business and your own personal finance, as it shows the difference between your assets and liabilities. It is important for a number of reasons. Growth As the value of your home increases, so does the price, thus increasing equity in the property. Similarly, as your business sales increase, the equity increases as well. Therefore, the more equity that you have, the less debt is to be repaid. This makes your life more comfortable presently and in the future. Value The importance of having your own equity in your business is to attract and encourage investors in your business. Your repayment to an equity investor is based on the company's growth and profit, rather than on immediate repayment of debt as with a bank loan. Good equity means good credit. Opportunities The growth and equity potential in a company are important in securing an equity investor. An investor looks for opportunities to build equity in a company for private equity investments. Projects are limited compared with the higher demand for equity financing, which makes investors selective about their investment choices. The investor's knowledge of the business, an existing relationship with the owners, and a management team and business model in place, are more attractive for investment for an equity investor than those at a planning stage. Sources Friends, relatives and investors are sources of equity investments, important in helping you to build equity. An equity investor seeks opportunities to invest in homes or companies with increasing value that reduces your debt. He may also provide counselling services for the growth of your business. Friends and relatives are sources of personal loans, which are not expected to be repaid immediately, thereby reducing your personal debt.