What is Equity? (Plain English Definition)
Definition: Equity represents ownership in a company through shares of stock, or more broadly, the value of an asset after subtracting any debts owed on it.
Equity Explained Simply
Equity has two common meanings in investing. First, it refers to stocks -- when people say equity investments, they mean investments in stocks or stock-based funds. An equity ETF holds stocks, as opposed to a fixed-income ETF that holds bonds.
Second, equity means the ownership value in an asset after subtracting liabilities. If a company has $100 million in assets and $60 million in debt, its shareholders' equity is $40 million. Similarly, if your home is worth $400,000 and your mortgage balance is $250,000, you have $150,000 in home equity.
In the ETF context, equity almost always refers to stock-based investments. Equity ETFs are the most popular type, making up about 80% of all ETF assets. They can be broad market funds holding thousands of stocks or narrow thematic funds focused on specific sectors, regions, or investment styles. Understanding that equity means stocks helps you navigate ETF classifications and build a portfolio with the right mix of stocks and bonds.
Equity Example
A financial advisor recommends a portfolio of 70% equity and 30% fixed income. This means investing 70% in stock ETFs (like VTI for U.S. stocks and VXUS for international stocks) and 30% in bond ETFs (like BND). With a $100,000 portfolio, you would put $70,000 in equity ETFs and $30,000 in bond ETFs.
Why Equity Matters for ETF Investors
Understanding the term equity helps ETF investors navigate the investment landscape and communicate clearly about their portfolios. When a fund is classified as an equity ETF, you immediately know it holds stocks and carries the associated risks and return potential of stock market investing. For ETF investors, equity exposure is typically the growth engine of a portfolio. Over long periods, equities have outperformed bonds, cash, and most other asset classes. Determining how much equity exposure you should have is the most important portfolio decision you will make, and it should be based on your time horizon, risk tolerance, and financial goals.
Equity vs Fixed Income
| Equity | Fixed Income |
|---|---|
| Equity represents ownership in a company through shares of stock, or more broadly, the value of an asset after subtracting any debts owed on it. | See full definition of Fixed Income |
While equity and fixed income are related concepts, they serve different purposes in the world of ETF investing. Understanding both terms helps you make more informed decisions about which funds to include in your portfolio and how to evaluate their performance.
Related Terms
Deepen your understanding of ETF investing by exploring these related concepts:
Fixed Income
Fixed income refers to investments that provide regular, predictable interest payments, primarily bonds and bond-like securities.
Asset Class
An asset class is a group of investments that share similar characteristics and behave similarly in the market, such as stocks, bonds, or real estate.
Asset Allocation
Asset allocation is the strategy of dividing your investment portfolio among different asset categories like stocks, bonds, and cash.
Market Capitalization
Market capitalization is the total value of a company's outstanding shares, calculated by multiplying the stock price by the number of shares.
If you’re serious about learning ETF investing properly, we recommend this highly-rated Udemy course that teaches a complete selection framework — from picking profitable ETFs to building a recession-proof portfolio. No finance background needed.