eli5:Please explain to me what is meant by term “equity” , if possible also explain with the help of an easy example , i am unable to understand from google also the example there are complicated
In: Economics
If you’re buying a 200,000 house, you don’t usually have that all up front. Say you have 50,000 for the down payment. Then you have the bank pay for the rest of it, and slowly “buy” your house back from the bank over time.
The part of the home that you’ve paid for is called equity.
Equity is basically your partial ownership of something.
So like with home equity, you take out a mortgage from your bank. The bank owns the house at first because they paid the money. But after you’ve paid back half the loan that represents you owning half the houses value. The bank still has control though, but if the house was foreclosed for some reason you get half the sale value. (Minus fees and other things that the bank makes you pay)
Things like stock are also technically equity, representing partial ownership of a company.
But the term equity tends to get used more on things that can’t be divided. Like houses or cars. Or ownership of a private company that doesn’t have stock.
In accounting there are assets and liabilities.
Assets are things that companies have which have value. Computers, vehicles, etc.
Liabilities are things the company owes to other companies.
They’ll have a balance sheet where they have everything listed to know the status of the company. (There are more things but these are the basic.ones for this example)
The companies equity would be how much they would have if they suddenly had to pay off every other companies bills and then try to sell and liquefy all their assets.
So, if you were a company and suddenly had to pay off your mortgage, your loans, which was $10,000 but could sell all your equipment and tools and made $12,000. Your equity would be $2,000.
There are many definitions, so I wish you’d used it in a sentence.
One use is as a type of investment. An equity investment might be buying stock in a company.
Another economic use is as a social justice goal, so employee equity might be increased by giving them company stock as part of their pay, just like the CEO.
One of the best uses of ELI5 is to use the “search” function to find explanations of your word. Don’t forget to restrict your search to ELI5. Searching gets you better answers faster than asking again.
Thank in advance kind strangers
Equity is the value of something you own that is over and above whatever debt you owe on it. Example: You have car that’s worth $20k and you owe $15k on the car loan. Your equity is $5k.
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