Equity.

Equity represents the shareholder's ownership interest in the business.

It can be made up of a large number of components, but in its most simple terms, it consists of two things.

Share capital, money that investors put into the business when they bought new shares issued by the company, and retained earnings, which is the cumulative profits that the company has made in the past, which have not yet been paid out to shareholders as dividends.

Shareholders have a residual claim on the business.

If you sold off all of the assets the company has and used the proceeds to pay off all of its liabilities, the remaining money would be owed to the shareholders.

That is what we refer to as shareholders equity.

However, equity is different to the liabilities on a company's balance sheet.

This is because the company has no obligation to give money back to its shareholders.

While a lot of companies do pay dividends, there is no legal requirement to do so.

This also applies to the shareholders' initial investment. Equity does not have to be repaid, unlike debt.