What Is Equity in Finance? A Guide to Understanding Equity

In a world of finances, equity refers to raising the capital by selling shares of a private company to financial institutions or to institutional and public investors. The main reason usually lies in the fact the company found itself in bill-paying trouble, or it has the intention of cumulating funds in order to invest in its growth. The whole process is based on selling pieces of ownership in exchange for cash.

Now, you need to understand that there are book value and market value of equity. The first one represents the difference between the company’s liabilities and assets in its balance sheet, while market equity value is equal to its share price at the moment, or the price defined by the valuation professionals or investors. 

How equity in financing works?

Besides the fact equity in financing is based on selling the common equity, it also includes alienation of a different kind of equity or non-equity instruments that include common shares and warrants as equity units, preferred stock, and convertible preferred stock.

One of the most popular methods of raising funds regarding equity in financing is via Venture Capital (VC) financing. The Venture Capitalists are net worth individuals who are willing to invest in strong and stable companies by buying their shares. Now, if you are interested in becoming a successful shareholder, you can find out more at Lyxor ETF.

What you should know

The process of equity in financing is regulated by national and local financial laws, which are designed to protect investors from unreliable and untrustworthy operators. Therefore the action is followed by an offering memorandum or prospectus that will provide every party interested in investing with extensive information about the company and merits of the financing.

The state of the financial markets and equity markets will determine the level of investor’s appetite for equity financing. But you should bear in mind that even though a steady pace of equity financing in one company indicates there’s a reason for investor’s trust, the large amount of investing can be a sign of excessive and unjustified optimism and a looming market top.