Equity has at least three specific meanings: financial and legal meanings, both of long standing, and a relatively new but increasingly often-seen (albeit much vaguer) family of political meanings. What all three senses have in common is connoting fairness in some way or other. By far, the most frequently encountered sense is the financial one, denoting a holding of stock or shares in a company, and some at least of the family of political usages are derived from that sense (see below), often in contrast with equality.
In the legal sense, Equity is the law that developed in England in the Court of Chancery prior to 1873 (at which point the Judicature Act gave the courts jurisdiction in both common law and equity). It developed largely as a reaction to the strict rules enforced in the common law courts. Although initially more flexible than the common law (thus prompting the famous remark by John Selden that “Equity varies with the length of the Chancellor’s foot”) equity has become more fixed over time.
In the United States the Federal government and most of the State governments have merged their equitable and common law courts. But principles of equity remain very important in many legal doctrines, such distinguishing when a plaintiff has a right to a jury under the U.S. Constitution.
In a business context, equity financing is one of two principle ways for a company to finance (raise money for) an investment; the other is debt financing - borrowing money at interest. Rather than borrow the money, the directors can decide to issue (ie sell) newly-created shares in the company. The money raised belongs immediately to the company itself and does not have to be repaid (although it is possible for the company later to buy-back shares at the prevailing market price, thereby effectively reversing the process). The new investors in the company therefore surrender their money indefinitely; what they get in return is a proportionate share in the ownership, control and subsequent profits of the company. In particular, each is entitled to an equal share of the profits corresponding to the proportion of shares held: every share is of equal worth, hence equity. (There are, however, devices like eg special shares, or even so-called 'golden shares', that can compromise this principle - for example, by granting shareholders a profit-share without sharing control. Such shares are of lesser value, inevitably, but the lower cost can attract 'silent' investors who are uninterested in influencing how the business is actually run.)
The 'share of control' component of equity finance gives rise to a broader use of equity in certain closely-related contexts. German industrial democracy is a good example. In the largest German companies, worker's bodies like trade unions often have a limited number of management positions, and even seats on the company board, reserved for them - even though this doesn't correspond to any actual shareholding. By virtue of representing a sizeable number of employees, the union is thought to have enough "skin in the game" to deserve, in the name of equity, some share of control (though not of ownership or profits; unlike the owners, the workers still get paid even if the company loses money, unless it loses so much as to go bankrupt). This practice is fairly rare in most English-speaking countries like the US and the UK, but the system's defenders argue that recognizing equity in this broader sense makes union-management relations much less adversarial, so reducing unrest and thereby improving productivity, to the gain of all. Its critics typically allow this, but insist that the game is never worth the candle because investors are deterred to the exact extent that their share of control is diluted, noting that nothing is stopping the union from investing directly - nor individual workers, for that matter. The question may never be settled: in countries such as post-war Japan where industrial democracy has clearly been successful, a very different cultural context has, equally clearly, been a greatly significant factor in that success. Much the same is likely true, albeit perhaps to a lesser extent, in Scandinavia; hence, when American self-styled "Democratic Socialists" like Congresswoman Alexandria Ocasio-Cortez insist that all they are seeking to do is to make the US more like Sweden, they simply overlook that Americans are not and never will be anything like Swedes. (God forbid.)
'Popular capitalism': the British experiment
Measures to encourage employee share ownership however, thereby giving workers an incentive to take a broad view of their business's interests, have often been successful, sometimes very successful. The Americans having been insufficiently stupid ever to embark on a program of nationalization in the first place, history gave to the British the task of demonstrating why and how to reverse the process - although strictly they were anticipated on a small scale by the Canadians, who had vastly less industrial devastation to undo. Earlier attempts to 'denationalize' the so-called "commanding heights" of the British economy under the lackluster premiership of Edward Heath in the 1970s having come to nothing, it fell to middle-period Margaret Thatcher to champion the cause of 'popular capitalism' with an aggressive program of 'privatization' (although Thatcher herself disliked the word, at least initially; similarly, her longest-serving chancellor of the exchequer (=finance minister) Nigel Lawson's original coinage "people's capitalism" smacked, to her, far too much of "people's democracy," ie communist dictatorship, and was swiftly replaced).
The neologism 'Privatization', however, stuck - not least because no-one could come up with a superior alternative. But even if the word was ugly, the practice was usually a triumph and the overall results were quite remarkable: under Thatcher the proportion of British adults owning shares rose from one in fourteen to one in four. According to Lawson, an "encouraging feature" of the Thatcher-era privatizations was that the proportion of the workforce subscribing for shares in the company many times exceeded ninety percent (which turned out to be the average; it reached 96% at British Telecom where only one in twenty-five employees did not invest), and this always despite trenchant union opposition to boot: "trade union leaders would condemn the privatization with bell, book, and candle, and enjoin their members not to touch it with a bargepole, and their members would take not the slightest notice of them." The unions found one or two unlikely allies among the old guard in the City of London (=financial district), with the head of one broking house exclaiming "But John [Moore, Lawson's Financial Secretary], we don't want all those kind of people owning shares, do we?" Indeed they did.An arguably even more successful policy of the Thatcher government was the introduction of a tenant's right to buy their hitherto rented house from a local council or social housing association at a fairly favorable price by saving enough money to make the deposit (=down-payment) on a mortgage (perhaps ten percent or so of the sale price, in 1980s Britain). This perfectly illustrates equity in the derived sense simply of having some share in a capital asset. As a percentage, a home-owner's 'equity' in their house is 100 minus (100 x mortgage_debt_remaining divided by current_market_value), from which it follows that if house prices rise generally in real terms then the home-owner's equity will increase disproportionately in their favor because the mortgage debt is indexed to interest rates, not property values. The excess, known as a capital gain, is (potentially) taxable but, happily, in the UK capital gained on a "first home" was (and is) exempt from taxation - hence the huge success of the policy in the booming economy over which Mrs Thatcher presided. By the same token, if house prices collapse then home-owners can suffer negative equity whereby the mortgage debt exceeds the market value; the practical effect is to make it impossible for the home-owner to sell their house without either funding the difference from savings or, if they are able to at all, incurring it as an unsecured debt at (presumably) a higher interest rate due to the lack of security for the creditor - exactly what sadly happened to many late-comers to the 'right-to-buy' party under Mrs Thatcher's successor as prime minister, John Major, in the markedly inferior economic climate of the early 1990s.
- Nigel Lawson (1992). The View from No. 11: Memoirs of a Tory Radical. Bantam Press. ISBN 978-0-593-02218-4.