Equity represents an ownership interest in property, assets, ventures, investments, etc. Equity relates to assets owned either by an entity or a person (an investor, accountholder, etc.)

In accounting, equity refers to the difference between an entity’s assets and liabilities (the value of assets minus the value of liabilities) for a specific period of time (in which case, equity is known as shareholders’ equity or owners’ equity). In other contexts, equity may also imply the amount of own funds held in an account (e.g., a brokerage account) to establish or maintain a position in the market. In this sense, it constitutes the excess of securities over debt balance in a margin account.

On the other hand, market capitalization (market cap) is defined as the total monetary value/ amount of all outstanding shares of an entity (specifically, a publicly traded company). In other words, it is the market value of the common stock (ordinary shares) of an entity that reflects the cumulative value of all its stock shares. It is calculated by multiplying the the price of the stock by the total number of outstanding shares. Market capitalization gives a picture about the relative size of an entity as compared to the market. The market cap determines what an entity is worth on the open market, in addition to the way the market reflects its potential prospects. In short, this measure of value represents what investors are willing to pay for its stock in the market.

The equity of stockholders, also known as book value, refers to the accounting value of the stockholders’ claim on the assets of an entity. On the balance sheet, an entity presents its stockholders’ equity as part of the elements of its financial position. However, the market cap reflects the amount that an investor will potentially pay to acquire a share in the equity of all the stockholders.

By comparing equity and market capitalization (using a measure known as the price-to-book ratio), it can be determined whether the market undervalues or overvalues an entity’s equity. If market capitalization is more (less), then equity is overvalued (undervalued).