Equity

Equity has at least three specific meanings: financial and legal meanings, both of long standing, and a relatively new but increasingly often-seen (albeit much vaguer) family of political meanings. What all three senses have in common is connoting fairness in some way or other. By far, the most frequently encountered sense is the financial one, denoting a holding of stock or shares in a company, and some at least of the family of political usages are derived from that sense (see below), often in contrast with equality.

In the legal sense, Equity is the law that developed in England in the Court of Chancery prior to 1873 (at which point the Judicature Act gave the courts jurisdiction in both common law and equity). It developed largely as a reaction to the strict rules enforced in the common law courts. Although initially more flexible than the common law (thus prompting the famous remark by John Selden that “Equity varies with the length of the Chancellor’s foot”) equity has become more fixed over time.

In the United States the Federal government and most of the State governments have merged their equitable and common law courts. But principles of equity remain very important in many legal doctrines, such distinguishing when a plaintiff has a right to a jury under the U.S. Constitution.

In a business context, equity financing is one of two principle ways for a company to finance (raise money for) an investment; the other is debt financing - borrowing money at interest. Rather than borrow the money, the directors can decide to issue (ie sell) newly-created shares in the company. The money raised belongs immediately to the company itself and does not have to be repaid (although it is possible for the company later to buy-back shares at the prevailing market price, thereby effectively reversing the process). The new investors in the company therefore surrender their money indefinitely; what they get in return is a proportionate share in the ownership, control and subsequent profits of the company. In particular, each is entitled to an equal share of the profits corresponding to the proportion of shares held: every share is of equal worth, hence equity. (There are, however, devices like eg special shares, or even so-called 'golden shares', that can compromise this principle - for example, by granting shareholders a profit-share without sharing control. Such shares are of lesser value, inevitably, but the lower cost can attract 'silent' investors who are uninterested in influencing how the business is actually run.)