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Finance: What is Equity? 44 Views
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Description:
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
- 00:03
Finance a la Shmoop what is equity well its ownership that's
- 00:08
what here's equity here's equity and here's [Vehicle with a paid sticker on the windscreen]
- 00:12
equity this is your equity in the pie your share of ownership your one
- 00:19
ten-millionth ownership of whatever dot-com which just went public example
- 00:24
you buy a home for 500 grand putting down a hundred thousand dollars and [Chalkboard with price of a home in front of a house]
Full 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
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