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Equity

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In business, equity refers to value of ownership. The term equity has a connotation of partial ownership, either because of claims by other owners or the pledge of assets as debt collateral, or both. This meaning is encapsulated in the fundamental accounting equation, which defines owners' equity as equal to assets minus liabilities. Partial ownership is implied in the use of equity as a synonym for publicly traded stock, as in the term equity market. Residual ownership after subtracting the value of debt is illustrated by the term homeowner's equity. An important measure of the financial performance of an equity investment is return on equity (ROE), defined as net income divided by owners' equity. In economics, equity is used as a term for fairness. In modern American law, the term equity has a meaning derived from this economic usage that relates to the type of relief sough by a plaintiff, which is classified as either legal or equitable.



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