Stockholder equity is the worth of a company as it pertains to its shareholders. This amount normally equals the company’s reported net worth, which includes all of the company’s cash, real estate holdings and other assets, minus any money that the company has to pay out. Adjustments to stockholder equity occur with nearly all company actions, whether they result in profit or loss.
Net Worth and Stockholders’ Equity
Like the net worth of a company, stockholders’ equity generally changes with each financial year. The total equity goes up if the company makes profits during the year, increasing its net worth; the total equity goes down if the company has losses during the year, decreasing its net worth. The more profits a company makes, the more it increases stockholders’ equity.
Positive adjustments to stockholders’ equity occur through a few means, though these rely mostly on the profitability of the company. Sales of company merchandise or company services create financial profits. These profits get added to any assets that the company already has on hand and become part of the company’s net assets, so if the company has several profitable years in a row, the stockholders’ equity goes up each year. Additional cash earned through stock sales also has a positive effect on stockholders’ equity.
Negative adjustments to stockholders’ equity occur when the company pays out money or goes deeper into debt with creditors. If a company must make purchases, such as a new building or equipment, these expenses come out of the company’s net worth, though, if the building and equipment has value, they may also become company assets. Other payouts, including money donated to charity and dividends paid out on stock, subtract from a company’s net worth without adding any assets back to the company.
The main effect that stockholder equity has on shareholders is the determination of dividend amounts, though stockholder equity can affect shareholders more indirectly as well. Since stockholder equity represents the worth of a stock on the market, it may impact trading of the stock. The more the equity goes up, the more appealing the stock may be to buyers; the more the equity goes down, the less appealing the stock may become.