Equity: Definitions And Operation Of The Different Forms Of Equity

The equity of a company corresponds to the equity provided by partners or shareholders to finance a company . In other words, equity represents the financial value that shareholders would receive in the event of a company’s liquidation . The term equity is generally translated as “equity”, “investment capital” or “equity” in French.

A source of financing particularly appreciated by innovative companies, equity is equivalent to the capital injected into a company to enable it:

  1. To finance its activity
  2. To buy assets
  3. To serve as collateral for creditors
  4. To invest in development projects

To calculate the value of a company’s equity, simply subtract the value of all liabilities from the value of assets .

Equity has two distinct values: a book value and a market value.

What is equity for?

Equity is used to finance various projects during the life of the company in order to increase its operating potential . The company can then go public or be sold with the aim of making a capital gain.

Each equity investor receives shares in a company when they inject their own money into it. The number of shares is naturally calculated in proportion to the equity capital that the investor brings (right to dividends, right to vote, right to information, right of ownership of the asset).

Public Equity: Definition, Advantages And Disadvantages

The equity public means opening up the capital of a listed company to potential investors . In this case, the purchase of shares is made public.

For an investor, public equity represents a safer investment than private equity. Indeed, anyone can decide to buy shares (subject to certain rules to be observed), which gives access to the opening of the capital to the greatest number . Another advantage of public stocks is their liquidity, since most publicly traded stocks are available and traded daily on the public markets.

How Does Private Equity Work?

During a private equity transaction, investors bring together pools of capital from partners (called “partners”) to constitute the fund. Once their fundraising goal is reached, they close the fund and invest that capital in companies that they believe have high growth potential.

In exchange for the money injected, an investor receives shares in a company in the form of shares . The number of shares is calculated in proportion to the equity capital that the investor brings.

Private equity investors can enter a company’s capital throughout its life cycle : when it is growing strongly, in a phase of stagnation or even in the event of difficulty. The latter scenario is obviously the riskiest, as investors are nonetheless convinced that it still shows signs of growth potential.

Depending on the clauses defined at the time of the roundtable, an investor can decide to sell his shares to other shareholders already present in the company, to partners or to new potential investors . It sometimes even happens that a company financed by private equity can go public.