A Stockholder is a person, company or an institution who own one or more than one share of a company and on whose name share certificate has been issued by the company. They are the owners of the company 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. under shareholder’s fund.
Types of Stockholders
There are two types of shareholders:
#1 – Equity Share
Equity stockholders are the actual owner and members of the company. They have a voting right in the meeting. They have control over the company operations. Equity shareholders will get payment of dividend after paying it to the preferred stockholder. Equity stockholder is the main investor of the company, and this is a real 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..
#2 – Preference Share
These shareholders have a preference over equity stockholders. Preference shareholders generally receive a fixed dividend, and their dividend gets paid before equity stockholders. In case of bankruptcy, preferred stockholders are entitled to be paid from company assets before equity stockholders. Preference stockholders did 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
Let’s take an example.
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. of Max Inc as of 31.12.2018. In the below example, we will try to calculate stockholder’s equity by both the above two formulas.
In the below examples company has a bank balance of $ 300, an Inventory of $ 2500, and Debtors of $ 700. These come under the current assets of the company; therefore, the total current assets 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. are $ 3500. Under 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. company has a land worth $ 500, Building worth $ 2500 and Plant & Machinery of $ 1200; therefore, total non-current Assets of the company are $ 9200.
- Total Assets = Current Assets + Non Current Assets
- Total Assets =$ 3500 + $ 9200 = $ 12,750
Now we will calculate the Total Liabilities of the Company.
The company has a creditor of $ 1100 and short term borrowingsShort Term BorrowingsShort term loans are the loans with a repayment period of 12 months or less, generally offered by firms, individuals or entrepreneurs for immediate liquidity requirements. These are usually provided at a higher interest rate, these short term loans often have a weekly repayment schedule. of $ 400. These come under current liabilities. Therefore, the total current liability of the company is $ 1500. 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). , 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. of $ 7000.
- Total Liability = Current Liability + Non – Current Liability
- Total Liability = $ 1500 + $ 7000 = $ 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 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.
- Equity Stockholders= $ 1000 + $ 2500+ $ 750 – $ 0 = $ 4,250
Some of the advantages are as follows:
- They are the real owner 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.
- It is a permanent source of the company fund.
- They will get the dividend only in case of a profit of the company.
- 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.; their liability is limited to the extent of their investment.
- If the company performs regularly, then the value of shareholder investment will increase.
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. do not invest in equity stockholders.
- They have voting rights; they can create an obstacle for management to make the decision.
- In case of liquidation, equity stockholder gets their investment at the end after payment of creditors, debentures, 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. 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. of the company.
- If the company will not perform, then there is a chance that shareholders will lose their investment.
Generally, they are the owners of the company, but still, shareholders are treated separately from the company, and their liability is limited to the extent of their shareholding. They have some rights like voting rights by which they can elect the board of directors of the company and play a very important role in any decision making of the company like acquisitions, merger, or any other important decisions. The main benefits of these shareholders are increasing their value of shares and dividend of the companyDividend Of The CompanyDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company. when company business and profitability increasing regularly. Similarly, if the company is not doing good and not generating profit, then the value of shares will decrease, and shareholders will lose their money.
This has been a guide to what is a stockholder and its definition. Here we discuss the formula to calculate stockholder’s equity along with types and examples. You can learn more about valuation from the following articles –