What Is Equity? (Explained Simply)

Added: 2026-05-23

[00:00:00]People hear the word equity and think it's some kind of abstract finance term, but the concept is very simple. Every business owns assets, okay? Cash, inventory, accounts receivable, any kind of economic resource. But these assets don't just belong to the business owner.

[00:00:14]Some of these assets were financed with debt. Banks, lenders, and creditors might have a claim on these assets through liabilities. And this is where equity comes in. Equity represents the residual claim on the assets of a business after liabilities are subtracted out. Check this out. If assets equal liabilities plus equity, then equity is going to equal assets minus liabilities. All we've done here is refactor the equation, and in doing this we see why equity is called the residual claim. So if we take all the assets of the business and subtract all external claims, equity's going to be left over. So when someone says that they have an equity stake in a business, they're simply saying that they have a claim on the net assets of the company.