2. Types of Equity
Types of Equity
Many types of shares together form an equity. To be clear, corporate equity is the amount that the company’s shareholders and owners finance for the initial start-up and ongoing operations of the company. Total equity is the residual value remaining in assets after all liabilities have been paid. After that, it is reflected in the company’s balance sheet. Here are the most common types of shares:
Common stocks, or ordinary stocks, are types of stocks that represent the initial investment in a company. With this share, shareholders get certain rights to the assets of the company. Common shares are counted at par, which means the nominal value of the share. And the total share capital can be determined by multiplying the number of shares outstanding by the par value of the share. To be clear, shareholders have more power over the company and its management.
Preferred stocks or preference shares are issued to investors in a company and offer a fixed dividend. If the company is liquidated, the preferred shareholders will receive the full amount owed to them by the company before the common shareholders. And if dividends were suspended due to a problem with preferred shareholders, they will be paid first when the company is liquidated.
The company can change the characteristics of the preferred shares to make the contracts more attractive to potential investors. It can have, for example, call and exchange reservations. However, these shares do not give rights to the operation or management of the company. Shareholders also do not get voting rights. The only advantage is that they receive dividends regardless of what happens to the company.
Invested capital surplus, also known as additional paid-in capital, accumulates the additional amount paid by investors for shares over par value. This account is usually higher than the other accounts and can change as the company has gains and losses from the sale of shares.
Retained Earnings or Profits
This type of equity is retained earnings equity. This account shows the accumulated earnings of the company, and fewer dividends paid to shareholders. Simply put, retained earnings are the portion of a company’s net income that has not been distributed as dividends. It can be used for investments or saved for the future.
Some companies decide to buy back shares from shareholders. If so, the repurchased shares are classified as treasury shares. The company’s equity corresponds to the amounts paid to buy back shares from investors. This equity account usually has a negative balance and is added to the charges as a deduction from the total equity.
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