Equity method in accounting is the process of treating equity investments, usually 20–50%, in associate companies. The investor keeps such equities as an asset. The investor's proportional share of the associate company's net income increases the investment; a net loss, or proportional payment of dividends, decreases the investment. In the investor's income statement, the proportional share of the investee's net income or net loss is reported as a single-line item .
Investors keep equities as assets using equity method.
An equity investment generally refers to the buying and holding of shares of stock by individuals and firms in anticipation of income from dividends and capital gains. Typically, equity holders receive voting rights, meaning that they can vote on candidates for the board of directors (shown on a proxy statement received by the investor) as well as certain major transactions. Equity holders also receive residual rights, meaning that they share the company's profits, as well as the right to recover some of the company's assets in the event that it folds—although they generally have the lowest priority in recovering their investment. It may also refer to the acquisition of equity (ownership) participation in a private (unlisted) company or a startup company. When the investment is in infant companies, it is referred to as venture capital investing and is generally regarded as a higher risk than investment in listed going-concern situations.
Equities held by private individuals are often held as mutual funds or as other forms of collective investment schemes, many of which have quoted prices that are listed in financial newspapers or magazines. Mutual funds are typically managed by prominent fund management firms, such as Schroders, Fidelity Investments, or The Vanguard Group. Such holdings allow individual investors to obtain diversification of the fund(s) and to make use of the skill of the professional fund managers in charge of the fund(s). An alternative, which is usually employed by large private investors and pension funds, is to hold shares directly. In the institutional environment, many clients who own portfolios have what are called segregated funds, as opposed to or in addition to the pooled mutual fund alternatives.
A calculation can be made to assess whether an equity is over- or under-priced, compared with a long-term government bond. This is called the Yield Gap or Yield Ratio. It is the ratio of the dividend yield of an equity and that of the long-term bond.