What is Equity?

Equity is the owner’s claim in a business. It is a general term that is used refer to owners contribution he/she has made in a business. It represents the investors interest which may be in form of ordinary shares, retained earnings, general reserves, net profit, capital redemption fund, and share premium.Equity is representation of proportion of ownership as compared to external financing of a business.

When is Equity required?

Equity is required when no other source of external financing is available. It is also required when it is classified as a cheap source of finance.It is required when the management of a business does not want dilution of ownership when increasing the capital of the organization.

How does Equity work?

Equity originates from the owners of the business. Either, the owners initially contributes capital through new issue, or retained earnings and share premium.