Shareholder Equity Definition & Statement of Shareholder Equity

Shareholders’ equity is the value of owned stock within a company. It is equal to the firm’s total assets minus its total liabilities. The value of shareholders’ equity is also equal to share capital plus retained earnings less treasury shares. The value of shareholders’ equity is essential when determining the valuation of a publicly traded company.

Different types of shareholder equity include common stock, preferred stock, capital surplus, stock options, retained earnings, and treasury stock. Common stock is the shares normally traded on a public exchange. Preferred stock owners are guaranteed dividend payments before any are paid to common stock holders and also take precedence in case of liquidation. A capital surplus occurs when equity cannot be classified otherwise. It represents a stock issued at a premium over par value (think highly-anticipated IPOs). Stock options are rights by a company’s employees to engage in future transactions for company stock ata historical price. Retained earnings (or losses) are the portion of a firm’s net income (or loss) that is retained by the company rather than distributed to its owners. Finally, treasury stock is company stock that is repurchased by the firm. All of these are reflected within the total shareholder equity on the balance sheet.

The value of shareholders’ equity can fluctuate depending on the firm’s internal policies. Stock repurchases (treasury stock) put a limit on the number of shares available to the public and take some of the value from the shareholders’ hands and return it to the firm’s assets. This is an often-used tactic by firms who feel their stock is undervalued. Shareholder equity can also be radically affected by new accounting rules. This happened most recently in December, 2006 when pension funding and other post-retirement benefits had to be included on corporate balance sheets.

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