Understanding financial accounting practices for stock investments is helpful when undertaking any type of stock investment activity. Many investors use corporate accounting documents to calculate the financial strength of an institution prior to making an investment. Steady accounting practices are also important to ensure accurate reporting of investment activities for tax purposes. Most stock investment activities can be easily accounted for as part of an investment portfolio, although some activities, like dividends, require special attention.
Many investors analyze the financial standing of a corporation before deciding to buy that company's stock. Price-to-earnings ratios and other common financial ratios are often used to determine a stock's actual worth. One way to determine the financial stability of a corporation is to compare that company's total assets, liquid and otherwise, to the sum of the company's outstanding liabilities and owner's equity handed out through stock. Corporations are required to make financial documents needed to perform this financial analysis, including cash flow statements, balance sheets and income statements, available for stock investors.
Asset allocation refers to the segmentation of an investment portfolio based on the different types of securities held in the portfolio. Although stocks are a major portion of most investment portfolios, healthy investment portfolios also typically include other assets, such as mutual bonds or savings bonds. Segmenting an investment portfolio and having clear investment goals can help you determine the level of risk you can undertake in your stock investments. For example, an investor with moderate investment goals to be achieved in the long-term may be able to take a few stabs on riskier stock investments without mortgaging his financial future.
Reporting Tax Information
Tax accounting of your stock investments is also important if you earn money through cash dividends on your investment or through the sale of stock. Investors who sell stock through a brokerage firm will receive IRS Form 1099-B, which reports the gross proceeds from the sale of your stock to the Internal Revenue Service (IRS). When investors receive a cash dividend from a corporation instead of deciding to reinvest it into additional stock, IRS Form 1099-DIV reports the amount of the cash dividend earned. Form 1099-S is sent to investors who earn proceeds off a sale of housing cooperative stock as well as other real estate investment activities.
Splits & Dividends
Both stock splits and stock dividend reinvestment increase the amount of stock held in a portfolio, but accounting practices vary for each. A stock split doubles the amount of stock held in a specific company, but the stock value is cut in half at the same time. For asset accounting purposes, no actual change in an investment's size occurs during a stock split. Although stock dividends may only increase the amount of stock owned by a couple of shares, the actual value of the investment increases because the share price doesn't drop at all. Dividends are typically accounted for in an investment ledger by tracking the dividend earning as part of the capital paid for the stock.
- PrinciplesOfAccounting.com: Chapter 1: Welcome to the World of Accounting
- U.S. Securities and Exchange Commission: Beginner's Guide to Asset Allocation, Diversification, and Rebalancing
- IRS.gov; Publication 550, Investment Income and Expenses: Sales and Trades of Investment Property; 2010
- PrinciplesOfAccounting.com: Chapter 14: Corporate Equity Accounting