In a publicly traded company, investors buy shares of the company’s stock and receive partial ownership in the company. Companies report stockholders' equity in their financial statements to stockholders. This tells investors what their shares in the company are worth. Understanding what goes into this calculation will help you better understand the value of your stock investment.
Stockholders' Equity Definition
Stockholders' equity is what would be left over for stockholders if a company were to sell off all its assets and settle all its debts and other liabilities. Mathematically, it can be expressed as follows: Assets minus liabilities equals stockholder’s equity. This is typically reported on a company’s balance sheet.
Understanding Common Stockholders’ Equity
Many corporations issue just one kind of stock, called common stock. In such cases, all investors in a corporation share the common stockholders’ equity. If the company were to sell off all its assets and settle all its debts and other liabilities, all the stockholders' equity would be divided by the number of shares issued to determine how much each stockholder would receive per share.
Common Stockholders’ Equity Reporting
When you look at the stockholders’ equity section of a corporation’s balance sheet, you’ll generally see four categories: paid-in capital, retained earnings, treasury stock, and accumulated other comprehensive income. "Paid-in capital" is what a company received when it issued shares of its stock. "Retained earnings" refers to net income that the company keeps to use for business purposes rather than paying out as dividends to stockholders. "Treasury stock" refers to shares the company reacquired for itself from shareholders (if it had a lot of unused cash and repurchased its own stock) but doesn’t retire, meaning that they can be resold at some future point. "Accumulated other comprehensive income" is income not included in the company’s net income calculation, including unrealized gains on investments and foreign currency transactions.
When There’s Preferred Stock
Some companies issue common stock and preferred stock. This can make understanding the common stockholders' equity a bit more complex. That’s because preferred stock holders typically forgo the right to share in any earnings that exceed their dividends. At the same time, they are guaranteed to get their dividends before a single penny is paid out to common stockholders. So if a company issues a preferred stock with an annual dividend of $10, these stockholders must get $10 per share before common stockholders are paid. This can reduce how much equity is left for common stockholders.
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