What does the term 'equity' commonly refer to in finance?

The term 'equity' in finance primarily refers to the ownership interest in a company. This encompasses the value of shares held by shareholders, representing their stake in the company after all liabilities have been settled. When you own equity in a company, you hold a claim on a portion of the assets and earnings of that company. This is crucial because shareholders benefit from the company's growth and profitability through potential dividends and capital gains when the company’s stock value increases.

In contrast to other financial terms like assets that can be liquidated, which focus on the convertibility of resources into cash, or the amount owed to creditors, which highlights liabilities, equity emphasizes ownership. Cash reserves are merely a part of a company's balance sheet, reflecting its liquidity, but they do not capture the essence of ownership like equity does. Therefore, understanding equity is fundamental in assessing a company's financial health and valuation from an ownership perspective.