Business

Definition of Stockholders ‘Equity and Statement of Stockholders’ Equity

Social capital is the value of own shares within a company. It is equal to the company’s total assets minus its total liabilities. Equity value is also equal to share capital plus retained earnings minus treasury shares. The equity value is essential in determining the valuation of a publicly traded company.

The different types of capital stock include common stock, preferred stock, excess capital, stock options, retained earnings, and treasury stock. Ordinary shares are the shares that are normally traded on a public exchange. The owners of preferred shares are guaranteed payment of dividends before they are paid to common shareholders and also have priority in the event of liquidation.

A capital surplus occurs when equity cannot be classified otherwise. Represents a share issued with a premium over par value (think highly anticipated IPOs). Stock options are rights of employees of a company to carry out future transactions in company shares at a historical price.

Retained earnings (or losses) are the portion of a business’s net income (or losses) that the business retains rather than distributes to its owners. Finally, treasury shares are company shares bought back by the company. All of these are reflected within total equity on the balance sheet.

The value of stockholders’ equity can fluctuate depending on the internal policies of the company. Share buybacks (treasury shares) put a limit on the number of shares available to the public and take part of the value from the hands of shareholders and return it to the assets of the company.

This is a tactic often used by companies that feel that their stocks are undervalued. Net worth can also be radically affected by new accounting standards. This happened most recently in December 2006, when pension funds and other post-retirement benefits had to be included on company balance sheets.

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