What are the Components of Stockholders Equity?t are the Components of Stockholders’ Equity?
What are the Components of Stockholders Equity? Equity Instruments Investment media representing an ownership position is the equity investment in which the investor is an owner of the firm and is thus entitled to a residual share of profits. Equity instruments differ from fixed income securities in that their returns are not contractual. Returns can be much better or much worse than those from a bond. The equity ownership, however, arises out of the indirect equity investment and direct equity investment. Before going to describe the direct and indirect equity investment, we need to identify the components of equities.
Components of Equities
Capital structure refers to long-term sources of financing for a firm. It is consisted of long-tern debt and equities. Shareholders’ equity is a residual item that is not fixed. It is the difference between the assets and all other liabilities of a firm which is found as:
|Assets – Liabilities = Equity|
However, the equities of a firm are comprised of the following components:
- Common stock: The amount of money paid by the owners of the organization measured as the product of par value (face value) and number of shares outstanding.Common stock may be defined as the residual ownership of a corporation, which is entitled to all assets and earnings after the other limited claims have been paid and which has the basic voting control. In short, common stock is the fundamental ownership equity. The investor in common stock thus occupies a position directly comparable to that of the owner of a firm or a factory. Common stock bears the main burden of the risk of the enterprise and also receives the lion’s share of the advantages of success. Common stock has no maturity date rather its life is limited by the length of time stated in the corporate charter.
- Preferred stock: The amount which is measured by the par value of any shares outstanding promising to pay a fixed rate of return in the form of fixed dividend.Preferred stock is a hybrid sorts between a fixed and variable income security. It is an equity security with an intermediate claim between bondholders and stockholders on a firm’s assets and earnings. In the event of liquidation, preferred stockholders have a claim on available assets before the common stockholders. In addition preferred stockholders get their stated dividends before common stockholders receive any dividends. Many issues of preferred stock are callable at a stated redemption price. Preferred stocks are usually perpetual securities having no maturity date, although there are exceptions to the general rule.
- Surplus: The excess amount above each share of stock’s par value paid by the shareholders.
- Equity reserves: Representing any fund for contingencies, providing a reserve for dividend expected, and a sinking fund to retire stock or debt in the future.
- Undistributed profit: The net earnings after tax that is retained in the business rather than distributing to the shareholders as dividends
- Subordinated debentures: Long-term debt carrying a convertible feature. The holders of them have the right to exchange their debt for shares of stock.
- Equity commitment notes: Debt security repayable only from the sale of stock.
- Minority interest in consolidated debentures: The holdings of ownership shares of other business enterprises.
What are the Components of Stockholders Equity?