Equity
Family III · Risk
Not to be confused with account balance, free margin, margin.
Equity is the net value of a trading account, calculated as the account balance plus or minus the unrealised profit or loss on open positions. It represents the amount that would be returned to the trader if all positions were closed at current market prices and any outstanding loans were repaid. Equity changes continuously with market prices, unlike the account balance, which only changes when a position is closed or a deposit or withdrawal is made.
Equity in a leveraged trading account
In margin trading, equity is the sum of the account balance and the floating profit or loss. The account balance is the amount of cash in the account, excluding any unrealised results. Floating profit or loss is the mark-to-market value of open positions. Equity is therefore a real-time measure of the account's net worth.
Equity is used to calculate the margin level, which is the ratio of equity to used margin. A margin level below a broker-specific threshold may trigger a margin call or automatic liquidation of positions. The exact threshold varies by broker and by regulatory jurisdiction.
Worked example
An account has a balance of $10,000 and one open position with an unrealised loss of $400.
If the position were closed at that moment, the balance would become $9,600 and equity would equal the balance.
Equity as ownership
In corporate finance, equity refers to the ownership interest in a company, represented by shares of stock. Shareholders' equity is the residual claim on assets after all liabilities are paid. It appears on the balance sheet as total assets minus total liabilities. This meaning is distinct from the trading account sense, though both refer to a residual value after subtracting obligations.
Often confused with
- account balance
- The total value of funds in a trading account at a given moment, comprising deposits, realised profits and losses, and any adjustments, but excluding floating profit or loss on open positions.
- free margin
- Free margin is the portion of a trading account's equity that is not currently committed as margin for open positions, and it represents the funds available to open new trades or absorb losses.
- margin
- Margin is the collateral a trader must deposit and keep with a broker to open and maintain a leveraged position, calculated as a percentage of the position's notional value.