Definition
The term equity interest refers to the level of ownership an investor has in a business. Equity interest is oftentimes measured in terms of common stock.
Explanation
Both businesses and individuals can have what is referred to as equity interest in a business. The term originates from the financial accounting concept of owners' equity, which is the capitalization derived from issuing shares of common stock. An investor's equity interest in a business is the sum of all the common stock held directly plus warrants, options, and other rights they may have to shares of common stock or agreements that allow the investor to share in the profits of the company.
Equity ownership allows individuals and businesses to realize a return on their investment in several ways. For example, the business may pay a dividend to shareholders of common stock. They are also entitled to share in the profits of the company, which are identified as retained earnings and found in the owners' equity portion of the company's balance sheet. Finally, if an investor owns 20% of a company's common stock, they are said to have an equity interest of 20% and would be entitled to 20% of the company's after-tax profits.
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