While investing, we can’t run away from understanding how prices are quoted. When a property is marketed for sale at $1 Million, we are referring to the Total Asset Price. Whether or not the buyer is going to take up loan to finance part of the acquisition, it is not the concern of the seller. If the buyer is going to borrow $800k, then $800k is the Liabiltiy (in accounting term), and down payment of $200k is called the ‘Equity’ in accounting term.
Then, what about stock prices quoted in the stock exchange? When stock price quoted as $2.00, what is it referring to?
Answer is, when we are investing in to stock of the company, we are in fact buying into the equity of the company. Equity (aka Net Worth, Net Asset, or Book Value) is the residual value after the Liability (e.g. debt) is deducted from the Asset Price. Therefore, there is difference in meaning, between how stock prices and the property prices are quoted.
To understand the relationship of the asset, liability and equity, they are
Asset – Liability = Equity or
Asset = Liability + Equity
