When you trade in any financial market with a broker, you will have a balance in your trading account. Using that balance, you can open different market positions to trade different financial instruments.

Your trading account equity includes the money in your balance and the money you invested in market positions. If you have any open position in the market, your equity changes according to your returns from the trade.

Your market position returns are more likely to change moment by moment because market prices fluctuate, which means that your equity is also fluctuating. Depending on your market returns, your equity may increase or decrease.

"The stock market is filled with individuals who know the price of everything, but the value of nothing." - Phillip Fisher

Your equity changes according to your market position. This means that your equity is now different from what it was 1 day, or even 2 hours ago, simply because the financial markets keep moving.

Most brokers’ websites automatically calculate the equity and balance of your trading account, and you are most likely going to see them without doing calculations. However, there are some basics that you need to know.

If you have active trades

Your equity depends on your active trades, and it changes constantly if you have an active market position.

Let’s say for example you have deposited $1,000 into your trading account, and you bought 1 share of company ABC that cost $100. If the stock price declines and your market position is now worth only $90, your equity is then calculated by the sum total of the unused money left in your account plus the returns of all your open market positions ($900 + $90 = $990).

Therefore, we can conclude that if you have active trades, your equity is the remaining balance in your account plus the current value of active trades.

If you don’t have active trades

It is easier to calculate equity if you don’t have active trades because then your equity is exactly what you see in your balance. Here, you don’t need any additional calculations because you simply don’t have any active trades.

Consider the previous example - if you close your market position at $90 incurring a loss of $10, this return will show in your trading account. In this case, your trading balance will show $990, which is also your total equity.

Hence, we can conclude that if you do not have active trades, your trading account balance equals your equity.

Some traders confuse equity with balance. The equity takes into consideration the worth of your active market positions along with the remaining amount in your trading account. It gives you the real-time worth of your money.

However, the balance only looks at your current trading account's remaining funds, without adding the worth of your active market positions.

You might have a huge balance in your account but very small equity. This happens if your market position is incurring large losses and went into the negative, so if you close your trade, it will reflect on your account dragging your balance lower than before.

Therefore, if you don’t have active trades then your equity is the same as your balance, but if you have active trades then your equity equals your balance added to the value of current trades.

Since equity relies on the value of your market positions, it changes every time the value of your trading positions changes. 

If you are trading on a margin, which means you are using borrowed funds from the broker through a process called leverage, the broker will ask you to keep the equity to a certain level, and you need to maintain it if the equity drops below the limit. 

As the equity includes the current market value, if you are trading with a margin and the return of the market position falls, you need to add funds to your account to increase the equity to a certain level.

The broker will ask you to do so because their money is also involved in your trade, and they are not willing to lose it. Your broker will initiate a margin call and give you a deadline to increase the equity in your account, otherwise, it will get liquidated.

• Equity includes the amount in your trading account as well as the return from your active trades 
• Equity differs from balance. The balance only looks at the amount in your trading account after closing market positions
• If you don’t have any active trades, then your equity and the balance are the same
• If you are trading on a margin (using leverage), the broker will require you to keep your equity up to a certain level, it is a risk-management factor for the broker