What is Equity?

Equity is your ownership interest in a given asset. That asset can be your home, a racehorse, a business, or any one of a number of other things that people tend to own. Your ownership interest is determined by the percentage of equity you have purchased or acquired in some other fashion (inheritance, for example) in that asset.

If the racehorse costs $3 million and you paid $1 million of the $3 million purchase price, then your equity ownership interest is 33.3%. If that racehorse wins a $10 million race, you net out the costs from training, feeding, housing, etc. (call it $2.5 million) and that leaves $7.5 million to be shared among the owners—your fair share as a result is $2.5 million, an excellent return on your equity investment.

On the other hand, if the horse came in last, your partners might ask you to put up more money or you might just get rid of the horse. In that case, you may lose most or all of your $1 million investment.

Aquiring equity is how you build your net worth. It is also fun to own things—it might be risky, but that is part of the fun and part of the thrill. Businesses, houses, even technology all mean something different if they are owned—even if only partly owned.

Project equity is money usually invested in a very specific business that results in one’s rights to ownership of a project in an amount equal to his/her percentage of investment. If a project requires $1,000,000 of equity investment and you invest $100,000, you will own 10% of the project. You will be entitled to 10% of the distributable profits, losses and, if the project is sold, 10% of the net purchase amount after other expenses are paid.

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