Shareholders Equity – What Comprises Common Stockholders Equity?

What Comprises Common Stockholders Equity?

Equity of common stockholders refers to that part of company’s funds that it would hand out to its common shareholders in the event of the company liquidating its assets. However, it should be understood that common shareholders get paid at the end. It simply means that first of all the company would have paid its various creditors and the amount left, if any, is distributed among-st common shareholders.

Equity of common shareholders is the share capital of the company and its reserved earnings less its treasury stock, whereas share capital represents the volume of funds that the company collected as a result of having sold its shares in the beginning. For instance, a company that sold two million shares @ $5/share, its share capital will be $10 million. Share price is not affected by the prevailing stock price of the company. Reserved earnings are included in the profit made by the company as it signifies the funds that supplemented company’s worth. Treasury stocks are those shares that the company repurchases from its shareholders, thus reducing the total amount held by its shareholders.

Assets and Liabilities

The simplest way for calculating the equity of common stockholders of accompany is to refer to its balance sheet and deduct its assets from the liabilities. The assets of accompany comprise of the property owned by it plus the sum of money it has in its books of accounts and the funds that it has to collect from others. On the other hand, the liabilities of a company comprise of its expenses, funds it needs to pay to others and long term debts, if any. For instance, a company having assets of $20 million and liabilities of $10 millions would have $10 million towards equity of common stockholders.

Equity per Share

Per share equity of common shareholders is the book value of each share and not the collective equity of common shareholders. You can find the per share equity of common shareholders by dividing the full equity by the quantity of outstanding shares. Let us say that the total outstanding shares of a company are one million, whereas the full amount of equity of shareholders is $15 million. So, in this case per share equity will be $15 million ÷ 1 million =$15/ share. You may calculate your equity by multiplying per share equity with the quantity of shares that you possess.

Misconception

As already mentioned, the equity of common shareholders of a company is independent of the traded prices of a company’s shares.  Equity of common shareholders is the price which they paid for buying shares of the company and not its current market price. The price of shares sold in the market keeps fluctuating as per the expectations of the investors. The share price of a company which is likely to grow up will go up, whereas the share price of companies which are not performing well or losing sales, will go down.

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