In this article, Shruti Chand (ESSEC Business School, Master in Management, 2020-2022) elaborates on the concept of Shareholder’s equity.
This read will help you get started with understanding shareholder’s equity and its meaning on the books of accounts of companies.
Shareholders equity on the Balance Sheet is the amount that the owners of the company have invested into the business.
Shareholders equity = Money invested by owners + Retained earnings deferred over time.
The three categories of shareholders equity are:
- Money invested by the shareholders:
- Common Shares: These shareholders are last in line when it comes to claims in case of dissolution of the company. They fall behind all the other dues of the company such as creditors, bond holders and preferred shareholders.
- Preferred Shares: These shareholders have a priority over the earnings of the company. What this means for the shareholders is that they are paid dividends before the common shareholders.
- Retained Earnings: is the percentage of net earnings that was not paid to the shareholders as dividends.
One can further understand the shareholders equity by thinking of it as the difference between what the business owns and owes, i.e.: Total Assets – Total Liabilities. If one sums the total assets on a balance sheet and subtracts all types of liabilities, what remains is the sum of money that the business owes to its shareholders.
Understanding Shareholders equity:
If the value of Shareholders equity is positive, it means that business is in a healthy state and has enough assets to cover its liabilities. On the other hand, if the Shareholders equity is negative, then the business owes more in liabilities than the assets it holds to back the claims.
Relevance to the SimTrade certificate
Understanding shareholder’s equity structure of a company is an important indicator of the health of a company and can help investors make better investment decisions.
- By taking the market orders course , you will know more about how investors can use various strategies to invest in order to trade in the market.
- By launching the series of Market maker simulations, you can extend your learning about financial markets and trading approaches.
About the author
Article written by Shruti Chand (ESSEC Business School, Master in Management, 2020-2022).