How to Understand Stockholder's Equity

by Jack Ori

When you buy stock in a company, you become a partial owner of the company. As a partial owner, you get a share of the stockholders' equity -- the company's net worth after it pays all its bills and expenses. You must understand what stockholders equity is about to determine whether to invest in a company and how much you are likely to earn on your investment.

1. Learn the basic definition of equity. Equity is a company's assets minus its liabilities. Understand that each stockholder is a part owner of the company, and that therefore the stockholders' equity can be determined by dividing the company's equity by the number of shares of stock outstanding.

2. Read the financial statement. If the financial statement has a section explaining changes in stockholders' equity, read this section very carefully to find out whether the stockholders' equity increased or decreased over the course of the year.

3. Invest in businesses that have a high level of stockholders' equity and have stockholders' equity that goes up every year. These businesses will probably give you a good return on your investment.