Ownership Equity

Ownership equity is the difference between the assets of a company and how much the company owes in various bills. A company with high equity is considered to be safer and more stable by investors than companies with low equity since a high equity means that the company keeps up with its various bills and is less liable to go bankrupt or have other financial disasters. Businesses can improve their equity by improving their assets and paying down their bills.

Important to Keep the Equity High

Ownership equity is also known to regular people as ‘shares’. A business sells shares in the company in order to drum up some extra cash and in return, those who buy the shares get a bit of the company and a piece of any profits (and pitfalls). This is why it’s so important for the business to keep its equity high; otherwise it will be a lot harder to attract potential investors and thus harder to shore up more money to put into the company. Ownership equity also comes into play in a bankruptcy court; it’s the last source of money when all others are exhausted in order to pay off debts.

Different Kind of Investors

New businesses have to work at their positive equity for a while because the owner will have to put in their own money for a while until investors can be brought in. There are a couple different kind of investors a new business owner can look at: investments from friends and family and ‘angel investors‘ which are wealthy investors who like putting their money in higher risk businesses like new ones.

Negative ownership equity also exists. This is when the liabilities on a company exceeds the assets of the company. This is most common when a business is just starting out and the owner has to put their own money into the company for a time just to break even, or more worryingly when the company is stumbling. Negative equity should be looked at very carefully by potential investors to see if it exists simply because the company is new or because the company is having financial problems. Both scenarios are higher risk than companies with established positive ownership equity, though a newer company might be a bit easier for an investor to start with.

Important to Keep Track of Ownership Equity

Ownership equity is an important thing for a business to keep track of because it will determine how much money it can attract from outside sources. It’s also important for non business owners to know about as it will affect choices in investing as well as choices in which company to go with for certain products. After all, if a company is teetering on the edge of bankruptcy, you probably won’t want to put to much money or time into it if you don’t have it to spare. Conversely, if a company has stable positive equity, you can be sure of getting some sort of return back for your investment.

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