We often hear the question, “how much equity do you have in your home?”  The term “equity” refers to ownership.  If there is a mortgage on the home, the total equity is shared by the borrower and by the lender.  That is, the borrower has an ownership stake and so does the lending institution.

When you buy a share of a company’s common stock, you are buying a share of equity because you are purchasing an ownership interest in that company.  How much is the equity stake worth when you buy?  That is, how much is the share of common stock really worth when you buy it?  You must be able to adequately answer that question before you buy; otherwise, you may overpay for the stock.  Overpaying can lead to painful losses.  Conversely, knowing the approximate worth of a stock and buying it for less than that worth can result in healthy investment gains.

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