Stockholder Definition
A Stockholder is a person, company, or an institution who owns one or more than one share of a company and whose name share certificate has been issued by the company. They are the company owners, but their liability is limited to the extent of their value of shares.
They are also known as shareholders. Fund generated from stockholders is reported in a balance sheet of organizations as paid-up capitalPaid-up CapitalPaid in Capital is the capital amount that a Company receives from investors in exchange for the stock sold in the primary market, including common or preferred stock. This considers the sale of stock that an issuer directly sells to the investor & not the sale of stock on the secondary market between investors. read more under shareholder’s fund.
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Source: Stockholder (wallstreetmojo.com)
Types of Stockholders
There are two types of stockholders:
#1 – Equity Share
Equity stockholders are the actual owners and members of the company with voting rights and control over the company’s operations. Equity shareholders get dividend payment after paying it to the preferred stockholder. The equity stockholder is the leading investor of the company, and this is a natural source of funds. These stocks are also known as ordinary sharesOrdinary SharesOrdinary Shares are the shares that are issued by the company for the purpose of raising the funds from the public and the private sources for its working. Such shares carry voting rights and are shown under owner’s equity in the liability side of the balance sheet of the company.read more.
#2 – Preference Share
These shareholders have a preference over equity stockholders. Preference shareholders generally receive a fixed dividend, and they are compensated or paid before equity stockholders. In an event of bankruptcy, preferred stockholders are entitled to be paid off from company assets before equity stockholders. Preference stockholders do not have any voting rights.
Stockholders Equity Formula
There are two methods for the calculation of stockholder’s equity.
- Stockholders Equity = Total Assets – Total Liabilities
- Stockholders Equity = Paid-Up Share Capital + Retained Earning + Accumulated other Comprehensive Income – Treasury Stock
Stockholders Example
Let’s take an example.
Given below is the balance sheetThe Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more of Max Inc as of December, 31, 2018. In this example, we will try to calculate stockholder’s equity using the above two formulas.
In the below examples, the company has a bank balance of $300, an inventory of $2,500, and debtors of $700. These come under the company’s current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more. Therefore, the total existing holdings of the companyCurrent Assets Of The CompanyCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more are $3,500. On the other hand, the Non-Current AssetsNon-Current AssetsNon-current assets are long-term assets bought to use in the business, and their benefits are likely to accrue for many years. These Assets reveal information about the company's investing activities and can be tangible or intangible. Examples include property, plant, equipment, land & building, bonds and stocks, patents, trademark.read more, company has land worth $500, buildings worth $2,500, and plant & machinery at $1,200; therefore, the total non-current assets of the company are $9,200.
- Total Assets = Current Assets + Non-Current Assets
- Total Assets =$3,500 + $9,200 = $ 12,750
Now we will calculate the total liabilities of the company.
The company has a creditorCreditorA creditor refers to a party involving an individual, institution, or the government that extends credit or lends goods, property, services, or money to another party known as a debtor. The credit made through a legal contract guarantees repayment within a specified period as mutually agreed upon by both parties. read more of $ 1100 and short term borrowingsShort Term BorrowingsShort-term loans are defined as borrowings undertaken for a short period to meet immediate monetary requirements.read more of $400. These come under current liabilitiesCurrent LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc.read more. Therefore, the total recent liability of the company is $1,500. The company has long term borrowingsLong Term BorrowingsLong Term Liabilities, also known as Non-Current Liabilities, refer to a Company’s financial obligations that are due for over a year (from its operating cycle or the Balance Sheet Date). read more, i.e., non-current liabilitiesNon-current LiabilitiesThe most common examples of Non-Current Liabilities are debentures, bond payables, deferred tax liabilities etc. Non-Current Liabilities are the payables or obligations of an entity which might not be settled within twelve months of accounting such transactions. read more of $7,000.
- Total Liability = Current Liability + Non–Current Liability
- Total Liability = $1,500 + $7,000 = $8,500
According to stockholder’s equity 1st formula:
- Equity Stockholders = Total Assets – Total Liability
- Equity Stockholders= $12,750 – $8,500 = $4,250
Now we will calculate stockholder’s equity as per the 2nd Formula:
- Equity Stockholders = Paid-up capital + Retained Earnings + Other Comprehensive Income – Treasury StockTreasury StockTreasury Stock is a stock repurchased by the issuance Company from its current shareholders that remains non-retired. Moreover, it is not considered while calculating the Company’s Earnings Per Share or dividends. read more
- Equity Stockholders= $1,000 + $2,500+ $750–$0 = $4,250
Advantages
Some of the advantages are as follows:
- They are the actual owners of the company.
- Equity stockholders have voting rights. They can vote on any board meeting of the company.
- It doesn’t create any obligation to pay a fixed rate of dividend.
- Funds generated are a permanent source of the company fund.
- Shareholders gain the dividend only in case the company earns profit.
- Holders of equity shares have limited liabilityLimited LiabilityLimited liability refers to that legal structure where the owners' or investors' personal assets are not at stake. Their accountability for business loss or debt doesn't exceed their capital investment in the company. It is applicable in partnership firms and limited liability companies.read more; their liability is limited to the extent of their investment.
- If the company performs regularly, then the value of shareholder investment increases.
Disadvantages
Some of the disadvantages are as follows:
- Investors who desire to invest in safe securities with a fixed incomeFixed IncomeFixed Income refers to those investments that pay fixed interests and dividends to the investors until maturity. Government and corporate bonds are examples of fixed income investments.read more do not invest in equity stockholders.
- They have voting rights; they can create an obstacle for management to make a decision.
- In liquidationLiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order.read more, equity stockholders get their investment after payment of creditors, debenturesDebenturesDebentures refer to long-term debt instruments issued by a government or corporation to meet its financial requirements. In return, investors are compensated with an interest income for being a creditor to the issuer.read more holders, and preference shareholders.
- The cost of equityCost Of EquityCost of equity is the percentage of returns payable by the company to its equity shareholders on their holdings. It is a parameter for the investors to decide whether an investment is rewarding or not; else, they may shift to other opportunities with higher returns.read more is high.
- The excessive use of equity shares is likely to result in the overcapitalizationOvercapitalizationOvercapitalization refers to a scenario wherein a Company raises a capital amount that is way more than the worth of its fixed assets. It means that a Company’s capitalized value becomes more than that of its actual market value. read more of the company.
- If the company does not perform, then there is a chance that shareholders will lose their investment.
Conclusion
Generally, stockholders are the company’s owners, but still, shareholders are treated separately from the company, and their liability is limited to the extent of their shareholding. However, they have some rights like voting rights. In addition, they can select the company’s board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more and play a vital role in any company decision-making, like acquisitionsAcquisitionsAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion.read more, mergersMergersMerger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm.read more, or any other important decisions. The main benefits for these shareholders is the increase in their sahe value and dividend of the companyDividend Of The CompanyDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more when the business gows and profitability increases regularly. Similarly, if the company is not doing good and not generating profit, the value of shares will decrease, and shareholders will lose their money.
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This has been a guide to what a stockholder is and its definition. Here we discuss the formula for calculating stockholder’s equity and types and examples. You can learn more about valuation from the following articles –
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