Stockholders’ equity changes as the net worth of a company changes. Any net assets, or profits, made by the company contribute to the stockholders’ equity. That includes all of the money that the company earns during a given year, whether those earnings come through sales of product or the trading of stock.
Any time that a company sells its products or services, it takes in money, which becomes part of the company’s assets. These assets help offset any expenses that the company may incur during the year, such as equipment purchases or rentals, rent for office space or loans. The more profits that a company takes in through the sales of its products or services, the more the company’s net worth increases. This increases the stockholders’ equity in the company as well.
Another method of generating company income is through stock sales. Much like product sales, the more shares of stock that a company sells, and the higher the per share price of that stock goes up, the more money the company makes. This income gets added to the company’s assets just like money made from product and service sales, increasing assets, net worth and stockholders’ equity.
When the company pays out money to creditors and other organizations, these losses affect stockholders’ equity as well. Any payout that works against profits and assets to decrease the company’s net worth also decrease the stockholders’ equity. This includes any donations that the company makes to charities, since these donations decrease the company’s income. Any money owed to creditors, such as building mortgages or lines of credit, also decrease the company’s worth and contribute negatively to changes in stockholders’ equity.
To some extent, how a corporation chooses to handle its stock may have an effect on the worth of the stock. If a company pays out dividends to its shareholders, for example, this decreases the company’s profits for the year, which subtracts from the company’s earnings for the year, decreasing the net worth of the company and, therefore, the stockholders’ equity. However, since dividends go directly to shareholders, even though the dividends lower the stockholders’ equity, they may be a beneficial stock.
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