What is Equity?

Account equity also called equity by some people represent the current worth of your trading account.

When you look at your trading platform on your monitor, you will notice that the current worth of your account is represented by equity and it swings with every tick.

It's the total of your account balance plus all of your open positions' floating (unrealized) earnings or losses.

As the value of your existing trades rises or falls, so does the value of your Equity.

If you don't have a single trade open, how do you calculate your equity？

If you don't have a single open positions, your Equity and your Balance are the same.

Equity = Account Balance

Example: Equity in the account When You Don't Have Any Trades Open

You make a $1,000 deposit into your trading account.

Your Balance and Equity are the same because you haven't open any trade yet.

If you have open trades, how do you calculate your equity？

If you have open positions, your equity is the total of those positions.

Equity = Account Balance + Floating Profits (or Losses)

Let's say account Equity, for example. When a current trade is losing money

You make a $1,000 deposit into your trading account.

Beyoncé announces that she is shorting the GBP/USD currency pair on Twitter. Because she's Beyoncé, you should do as she says and keep it brief.

Your deal indicates a floating loss of $50 once the price goes against you.

Equity = Account Balance + Floating Profits (or Losses)

$950 = $1,000 + (-$50)

Now your account will contain $950 in equity.

Account Equity, as example. When a Winning Trade Already Exists

Beyoncé tweets yet again, claiming to have changed her mind. She's now long the GBP/USD pair.

She appears to be crazy not only in love, but also in trade.

But, because she's Queen B, you listen to her and go long with her.

Price instantly moves in your favor, and the trade shows a $100 floating gain.

Equity = Account Balance + Floating Profits (or Losses)

$1,100 = $1,000 + $100

You now have $1,100 balance instantly in your account.

So far you have an open position, changes in current market values affect your account equity.

The current “TEMPORARY” value of your account is shown as equity. (Unlike a tattoo, which is...permanent.)

As a result, Equity is called a “floating account balance.” If you quickly close all of your deals, then it will become your “real account balance.”

What differences exist between equity and balance？

Let's start with a simple response.

Your Balance and Equity are the same if your account is “flat” or has no open positions.

However, if you have open positions, the Balance and Equity will differ.

· The Profit/Loss from Closed Positions is reflected in the Balance.

· Your profit/loss is calculated in real time and reflected in the Equity. Open and closed positions are both factored into the Equity.

This means that when you check at your Balance, you'll notice that

It is NOT the quantity of your funds in real-time.

Equity means the real-time amount of your funds because it contains current earnings or losses from open trades.

It's possible to have a huge Balance but a tiny Equity.

This happens when you have a lot of unrealized (floating) losses on your open positions.

If your Balance is $1,000 and you have an open transaction with a floating loss of $900, for example.

Your stake in the company is only $100.

Recap

We learned the following in this lesson:

· The floating profit (or loss) of all your open positions is added to your account balance (i.e. equity).

· Your account's “real-time” worth is represented by equity.

We learned the following in previous lessons:

· What is Margin Trading and How Does It Work？

Learn why it's critical to comprehend your margin account's operation.

· What is the definition of balance？ Your account balance means the amount of money in your trading account.

· What is the difference between unrealized and realized P/L？ Understand the impact of profits and losses on your account balance.

· What is the definition of a margin？ When you open a position, you must set aside and “lock up” a certain amount of money.

· What is the meaning of the term “used margin”？ The total amount of margin that is now “locked up” to sustain all open positions is called a used margin.

Let's have a look at the concept of Free Margin now.