ELI5%3A%20 What is equity in finance?
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Something real that you own. Could be a house, or a business that you started with some partners, or shares of a publicly traded company (which do make you a co-owner). In any of these cases, value of your property can increase (potentially a lot) or decrease (potentially to zero)
this is in contrast to debt, which is fixed principal amount with known interest, so debt payments are highly predictable. The only change is if borrower becomes bankrupt.
From a point of view of a company, it can get money in two different ways:
– debt, which has interest and needs to be repaid to avoid bankruptcy
– equity, meaning money that it “owed” to owners of the company. this includes their original investment, and any profits that the company earned since then (minus the dividens)
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