How Do Equity and Shareholders' Equity Differ?

Equity and shareholders' equity are not the same thing. While equity typically refers to the ownership of a public company, shareholders' equity is the net amount of a company's total assets and total liabilities, which are listed on the company's balance sheet. For example, investors might own shares of stock in a publicly-traded company. 

A Company's Equity Defined

Equity could also refer to the extent of ownership of an asset. For example, an owner of a house with a mortgage might have equity in the house but not own it outright. The home owner's equity would be the difference between the market price of the house and the current mortgage balance.

Shareholder's Equity Defined

In the case of a corporation, stockholders' equity and owners' equity mean the same thing. However, in the case of a sole proprietorship, the proper term is the owner's equity, as there are no stockholders. The equity of a corporation owned by one individual should also be listed as stockholder's equity because one person owns 100% of the stock.

Shareholders' equity is the net amount of a company's total assets and total liabilities, which are listed on a company's balance sheet. In part, shareholders' equity shows how much of a company's operations are financed by equity. 

Shareholders' equity is the amount that would be returned to shareholders if all the company's assets were liquidated and all its debts repaid. In short, shareholders' equity measures the company's net worth.

Shareholders' equity also includes retained earnings, which is the amount of profit leftover that is saved or retained and used to pay dividends, reduce debt, or buy back shares of stock. 

Shareholder's Equity As a Metric

Market analysts and investors prefer to see a stable balance between the amount of retained earnings that a company pays out to investors in the form of dividends and the amount retained to reinvest back into the company.

Shareholders' equity is an important metric for investors. The metric is used to determine the ratio return on equity (ROE). ROE is the result of a company's net income divided by shareholders' equity, and the ratio is used to measure how well a company's management is using its equity from investors to generate profit.