Equity value applies to many facets of finance and investing. It is, simply, the value of something to its owner. This concept applies to such varied concepts as personal property, real estate, individual investors and corporations. The definition of equity value differs slightly in each area because they each have different characteristics. The basic idea of ownership value, however, unifies the various uses of the phrase.
For resources, like vehicles and houses, the equity value is the total value of the object minus the outstanding debt against it. The value of the object is taken to be its current market value in the surrounding area. The principal of the outstanding debt is subtracted from this amount to find the equity value. Outstanding debt is only counted if it is legally binding; that is, if the owner would be required by law to repay the loan with proceeds from the sale of the object. Common debts that fall into this category are vehicle financing loans and mortgages.
In the stock market, equity refers to ownership in a corporation. Both common and preferred stock are forms of equity since a stock share represents the ownership of a certain percentage of a company. A share of common stock does not necessarily represent one out of the outstanding number of shares. Upon liquidation, some holders of preferred stock may choose to convert their shares to common stock, so each share of common stock may represent a smaller percentage than the current numbers of shares would indicate.
The equity value of a company has two definitions. The first is related to the use of the word equity to refer to stock shares. It is the total value of the company’s stock that is outstanding in the market. This is synonymous with market capitalization, or market cap. It is calculated by multiplying the total number of outstanding shares by the value of a share.
The second definition is calculated using the balance sheet of a corporation. It is the difference between the total assets of the corporation and its total liabilities. This measure is also called shareholders’ equity, net worth and book value. The figure that the balance sheet gives for equity value can be significantly different than that found using the above method for determining market cap. Some investors reject this use of the term "equity value," preferring to call it "enterprise value" and reserve "equity value" to describe a company’s market cap.
