Equity Definition

In financial markets, equity refers to ownership in a company, typically represented by shares of stock. It also refers to the value of an asset minus any liabilities associated with it. In a trading context, equity commonly describes the current value of a trader's account after accounting for open positions.

If a trader has a $10,000 funded account and currently holds open positions with an unrealised profit of $500, their account equity is $10,500. Monitoring equity in real time is critical in prop trading, as many firms impose equity-based drawdown rules. For instance, if a prop firm sets a maximum drawdown of 10%, the trader must ensure their equity never falls below $9,000 from the starting balance. Keeping a close eye on equity helps traders stay within risk parameters and protect their funded status.