Finance: What is Equity?

What is equity? It's ownership. A stock, not a bond. A common shareholder, not a debt obligator. When you own one share in a million-share outstanding corporation, you own 1 millionth of that corporation. And usually, each share of equity gets a vote in electing the board of directors.

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Transcript

00:27

taking out a loan or mortgage of four hundred grand over the next eight years

00:32

you pay down that mortgage to be just three hundred grand and in the mean time [A payment chart graph]

00:36

the value of your house has grown to seven hundred grand

00:40

someone actually knocks on your door and offers to pay you that much in cash that [Man knocks on door and offers to pay for the house]

00:44

day all right what's your equity ownership in the house worth well you

00:49

have seven hundred grand as the price of the thing you own you have three hundred

00:52

grand in loans against it so if you sell you have to pay back the loans generally

00:57

speaking and you're left with four hundred grand as the value of the equity

01:01

you have in your home so let's spin things differently instead of the bank [A number wheel spinning]

01:06

loaning you debt money to buy your home the bank decides to partner with you as

01:11

[Bank shakes a womans hand] a co investing equity player well together you buy a condominium for 250

01:16

grand with you putting down 100k and the bank putting down 150 K both in equity

01:21

time passes tick tick tick and you sell the condo a decade later for $500,000 [Woman sells condo for $500,000 and hands over apartment]

01:28

okay now who gets what well now the bank was your equity partner instead of your

01:34

debt partner or lender so when you bought the condo you owned a hundred

01:39

divided by 250 of it or 40% and the bank owned a hundred fifty over 250 of it or [Woman doing math calculations on a chalkboard]

01:47

60% nothing changed your ownership stakes remained flat at forty sixty so now

01:53

at 500 K you sell and you keep 40 percent or two hundred thousand dollars

01:57

and the bank keeps sixty percent of five hundred K or three hundred grand and you [Woman and bank stand as dollar signs fall from the sky]

02:01

both doubled your money and note the power of debt or leverage in this model

02:07

had the bank loaned you the 150 K as debt instead of being your equity [Bank hands money to woman]

02:12

partner you would have probably paid off $50,000 or so of that loan in the ten

02:16

years you had it so you'd owe a remaining hundred

02:19

thousand dollars but you'd have sold it for the same five hundred grand and

02:23

after paying off the loan you'd have four hundred thousand dollars in your

02:26

pocket instead of two hundred thousands and yes there were interest payments

02:30

that went along the way as well as upkeep and risk and other things but in [Interest payments of 351,000 dollars on chalkboard]

02:34

theory you could have rented the home and hopefully you'd have broken even in

02:38

rational real estate rental market sorry we usually don't put that much math in [Lots of numbers on a pie as girl takes a slice]

02:42

our pie