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What is an Equity Cap?

John Lister
John Lister

The phrase equity cap can cover several different concepts in finance. It can involve limits on ownership in a company, the total value of an equity market, a type of financial agreement, or simply equity capital. For this reason it is important to use the term in a clear context or to use a more precise synonym to avoid confusion.

An equity cap can be a government-imposed limit on ownership of a company. The most common variant of this is when a government limits the proportion of any domestic company which can be owned by foreign companies. An alternative would be a limit on foreign ownership across an entire industry. It's also possible to place a cap on the proportion of an entire industry which can be owned by one particular person or company, regardless of their nationality.

Businessman with a briefcase
Businessman with a briefcase

The phrase can also be used as a shortened version of "equity market capitalization." This refers to an individual market in equities, which is also known simply as a stock market. The market capitalization is the total value of the firms listed on the market, each firm's value being the number of shares multiplied by the stock's current market price. Tracking the market capitalization figure can both show whether or not the market as a whole is rising or falling, and show how stocks are performing overall in comparison to other types of investment.

Used in another context, an equity cap is where two investors make an agreement based upon the performance of a stock market. The usual system is that one investor pays a fixed amount to the other at the start of the deal. The other investor then pays money to the first investor on specified dates if a certain market condition is met. One example would be if they paid back one dollar for every point by which a stock market index exceeded a certain level in three months time.

The smiplest use of equity cap is as a less formal variant of the term equity capital. This is money raised from outside a company by selling part-ownership. This is usually by selling stock, either privately or by taking the company public and being listed on a stock exchange. The main alternative to equity capital is debt capital, such as issuing bonds. The major difference between the two is that the company must eventually repay the money raised through debt capital, but does not do so with equity capital.

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