# Equity - companies and corporations



## ampurdan

I've always wondered where the word "equity", when talking about the shareholder's equity of a firm, comes from.

In continental languages, we talk about "capitaux" or "fonds propres", "fondos propios", "das Eigenkapital", "fondi propri".

Where does the word "equity" to refer to that thing stem from? Does it have anything to do with the Equity legal system of the English tradition?


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## elirlandes

I always just assumed that it came from the fact that each share available in the company confers on its owner an equitable or equal portion of ownership in the company. As such, it has equity with the other shares.


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## ampurdan

But that does not need to be always like this. Firms can issue shares of different value and/or with different privileges.


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## elirlandes

True - but these are variations on a theme... I suspect that the complexities of different share catagories, preference shares etc came after the term was coined.

That said, my post was only a suggestion as to possibility of origin for the word.


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## ampurdan

I somehow supposed that it had something to do with the fact that equity is what's left for the owners or shareholders, once all debt has been paid, just as home equity is the value of your home once mortgage debt has been detracted. But I'm not very sure about why that is called "equity" either.


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## berndf

In my understanding it means a "fair" (=equitable) appraisal of the net worth of an estate or business.


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## Joannes

berndf said:


> In my understanding it means a "fair" (=equitable) appraisal of the net worth of an estate or business.


But that is traditionally what would be represented by the company's _assets_, the other side of the balance sheet , although that's not entirely correct either. Still, you may be right... Hm, interesting question..


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## CapnPrep

The use of this term is not (directly) related to the notions of mathematical equality (division into equal shares). And "fair appraisal of net worth" is a nice idea, but I don't think that's how capitalism works… 

_Equity_ is a term referring to a set of legal principles established in addition to — and taking precedence over — the "law" (narrowly defined), and originally corresponding to some idea of "natural justice" (_naturalis aequitas_ in Roman law). The term _equities_ later came to refer to _equitable_ rights or claims (valid "in equity", i.e. according to the principles of equity as applied by a court of equity). Ownership of real property was traditionally a matter of equity, not of law, so financial interests constitute an important class of equities. Which is why we now talk about homeowner's equity, shareholders' equity, negative equity, etc.


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## ampurdan

I thought it should be something like that, CapnPrep, but couldn't this be that the law allowed the mortgagee to get the house if the mortgagor did not pay, while equity allowed the mortgagor to recover the difference between the property value and the amount due?


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## Kevin Beach

CapnPrep's post is right, but it can be put more simply. In English law, there is a distinction between "legal ownership" and "beneficial ownership". The distinction arose hundreds of years ago because the Common Law rules were sometimes too harsh and produced injustices. The Lord Chancellors developed mitigating rules for the sake of equity, i.e. fairness.

Therefore, trustees own the _legal_ title to an asset but the beneficiaries own the _beneficial_ or _equitable_ title. The two sorts of rights used to be enforced by different by different types of courts, but since 1872 all English courts have enforced both legal and equitable rights.

When the concept of Joint Stock Companies (the predecessors of modern companies and corporations) started in the 17th century, managers held the assets on trust for the investors and issued certificates confirming the investors' entitlements. Thus the investors owned "equities" in the company, i.e. rights which, when enforced, overrode the trustees legal ownership for the sake of fairness or equity.


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## Kevin Beach

ampurdan said:


> I thought it should be something like that, CapnPrep, but couldn't this be that the law allowed the mortgagee to get the house if the mortgagor did not pay, while equity allowed the mortgagor to recover the difference between the property value and the amount due?


More importantly, the borrower has the right to redeem the mortgage by repaying the loan, even if the contractual time for repaying it has expired. That's called the "Equity of redemption" and works exactly like a beneficiary's rights against trustees and for the same reason.


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## ampurdan

Oh, that makes much sense, Kevin Beach. So I guess it's something similar when it comes to mortgaged properties, right?

EDIT - I did not see your previous post when I wrote the previous line. Thank you! And thank you all!


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## berndf

Joannes said:


> But that is traditionally what would be represented by the company's _assets_, the other side of the balance sheet...


No, you are confusing net and gross assets. The active side of a balance sheet shows gross assets.



CapnPrep said:


> The use of this term is not (directly) related to the notions of mathematical equality (division into equal shares). And "fair appraisal of net worth" is a nice idea, but I don't think that's how capitalism works…


It does; the term "fair value" is one of the most frequently heard terms in finance. "Fair" has a very technical meaning in finance. It means "derived by applying accepted rules of accounting and accountability". In modern derivatives trading "fair price" means "zero-arbitrage price", but that's a different matter though eventually the same concept of "fair" underlies this terminology.





Kevin Beach said:


> CapnPrep's post is right, but it can be put more simply. In English law, there is a distinction between "legal ownership" and "beneficial ownership". The distinction arose hundreds of years ago because the Common Law rules were sometimes too harsh and produced injustices. The Lord Chancellors developed mitigating rules for the sake of equity, i.e. fairness.


Right, that was my missing link. I wasn't aware that "beneficial ownership" was a concept of equity and not of law.
 
Though _Aequitas_ had already a double meaning in Classical Latin where it had the secondary meaning of _fair trade_ (again, in the capitalist sense of the word _fair_, i.e. not cheating; exploiting a counter party's desperation and other things  is not _unfair_ in this sense.). In ancient Rome, _Aequitas_ was the patroness of _honest merchants_. But this is probably not the origin of the English term. If it were then we should find traces of this meaning in French.


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## CapnPrep

berndf said:


> But this is probably not the origin of the English term. If it were then we should find traces of this meaning in French.


As I indicated above, the origin is _aequitas_ (as an ethical concept, not specifically economic/commercial), as opposed to _justitia_. And this term is certainly found in French, with the same meaning. However, as far as I know, French does not have the transferred meaning of _équité_ referring to an equitable right or interest, and so there is also no plural form _équités_ for shares in a company. [This use is not attested in English before the 20th century, according to the OED.]


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## ampurdan

"Equity", as a body of law and principles different from those of the Common Law of the land, is unique to the English legal tradition.


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## berndf

ampurdan said:


> "Equity", as a body of law and principles different from those of the Common Law of the land, is unique to the English legal tradition.


That is almost a tautology because the very concept of _Common Law_ exists only in the Anglo-Saxon tradition.

The concept of_ Equity_ (e.g. _bonum et aequum _in Latin, _Billigkeit_ in German) exists in virtually all legal traditions based on Roman Law. But only in the Anglo-Saxon tradition has it become so elaborate and formalized as to become source of judicature in its own right which is probably due to the inherent inflexibility of Common Law.


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