Learn how to invest money - Building Equity

To understand a good portfolio involves understanding the importance of increasing value or equity.


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1. A stock or any other security representing an ownership interest.

2. On a company's balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). Also referred to as "shareholders' equity".

3. In the context of margin trading, the value of securities in a margin account minus what has been borrowed from the brokerage.

4. In the context of real estate, the difference between the current market value of the property and the amount the owner still owes on the mortgage. It is the amount that the owner would receive after selling a property and paying off the mortgage.

5. In terms of investment strategies, equity (stocks) is one of the principal asset classes. The other two are fixed-income (bonds) and cash/cash-equivalents. These are used in asset allocation planning to structure a desired risk and return profile for an investor's portfolio.

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In a simplified manner of speaking, Equity = Asset Price (FMV) - Asset Liability (cost)

If the asset price increases as liablity stays the same, equity will increase.
If asset price stays the same and asset liablity increases, equity will be negative and you may want to think about selling (if there is negative cash flow).
If asset price and liablity increased together, equity will not change.

The right investment should not be based primarlily on equity as many real estate investors will tell you. Buy into the right deal today, by make money at the front of the deal and have the proper exit strategies before signing on the dotted line.

In the securities realm, you are basing your investment on a guess of what will go up and NOT come down. Did you know that stocks on a senior exchanges are LEVERAGEABLE the same way real estate is leverageable? A structure many people are doing today is leveraging the equity in their homes and redirecting it into higher growth investment strategies.
Home equity line of credit (HELOC) - if you get a HELOC at 8%, but invest in a mutual fund with a financial institution that averages a return of 15%, you will be placed in a net 7% earnings. You can leverage your securites on senior exchanges (such as stocks listed on AMEX, NYSE, etc.) like you would with your property.

Why build equity?

Using a house as an example, equity in a home is stable and predictable, a home cannot move nor be stolen, and the home is backed by land. By leveraging the value of the land, you can build investment assets without spending selling your property.

The richest menin the world (Warren Buffet, Donald Trump, Robert Kiyosaki, etc.) will tell you that holding assets and leveraging them to build an investment portfolio is how they have become financially successful not, by buying and selling, but buying and leveraging. Getting creative using leveraging is essential when you learn how to invest money.