Stockholder's Equity

Stockholders' equity is the book value of the company, the assets less the liabilities and it comes from two main sources. Money invested in the company by the Stockholders and from retained earnings that the company is able to accumulate over time through its operations. The contributed capital includes capital stock and additional paid in capital.

Common Stock

Holders of common stock are the primary owners of a company. They have control of the election of directors and vote on corporate policy. They are the lowest priority for compensation of earning or liquidation. They are entitles to the earnings in excess of obligations to creditors, employees, taxes and preferred shareholders.

Preferred Stock

Holders of preferred stock have a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights. The structure of preferred stock is specific to each corporation; however, the best way to think of preferred stock is as a financial instrument that has characteristics of both debt and equity.

Dividends

A dividend is a distribution of a portion of a business’ earnings to shareholders. Dividends are declared in advance to being paid out. Management must consider availability of funds and how best to use them between reinvesting them in growth of the business, paying down debt, maintaining a financial cushion or distributing to shareholders.

Cash Dividends

Money paid to stockholders, normally out of the business’ retained earnings. Once management has agreed to pay a dividend it will announce the event on what is called the date of declaration. At that time it will let the public know the date of record and the date of payment. As soon as the dividend is announced the business recognizes a liability, as Dividends Payable.

Property Dividends

A property dividend is an alternative to a stock dividend. A property dividend can be a physical asset, or a security that the business holds. An example would be silver mine that paid our ¼ ounce of silver for each share of stock in the hands of shareholders.

Liquidation Dividends

A dividend that is funded by the shareholder’s initial investment, rather than distribution of profits.

Stock Dividends

A dividend made in the form of additional shares, rather than cash or property. A stock dividend can be seen as a capitalization of retained earnings.

Stock Split

A corporate action in which a business divides its existing shares into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because the split does not add any real value.