Are you unsure how to calculate common stocks? Don’t worry, we’ll show you how to calculate common stock using a simple method.
We will explain how to calculate common stock in this article, but first we need to understand a few basics about stocks.
Stocks are a company’s share that can be purchased by anyone interested in investing. A corporation sells its stock to raise funds for future growth. Instead, the corporation gives stockholders voting rights and pays dividends.
Stockholders own a portion of the company and are entitled to dividends and voting rights based on their ownership percentage.
Stocks come in two varieties.
1.Common Stocks– An investor can buy both sorts of stocks when they are available. But most people invest in common stocks. A share gives the buyer one vote. Buying common stock entitles you to vote on critical corporate decisions. If the corporation issues dividends, they are entitled to them without preference.
- Preferred Stocks– Investors in preferred stocks are preferred over common stock holders when it comes to dividends. The disadvantage of preferred stock is that holders cannot vote.
Common stocks are discussed here, but preferred stocks are also included.
What is a dividend-A dividend is a payment made to the company’s shareholders. Dividends are decided by the board and approved by shareholders.
A balance sheet’s shareholder equity segment represents common stocks. Look at a balance sheet before learning more about common stocks.
A Balance Sheet
As a financial statement, the balance sheet It represents current assets, liabilities, and stockholder equity. It tracks the company’s income and expenses, compares them to the prior year’s figures, and calculates the net profit or loss. Let us explain with a table. Assume it’s a three-section balance sheet.
All items owned by the company for its growth
Debts and obligations owed by a firm and repaid afterwards.
In the liability section, common stocks are represented.
Now that we know the basics, we can go on to calculating common stock. We have a formula to compute common stock value:
Common stock is computed by adding Treasury Stocks to Total Equity and subtracting Preferred Stock, Additional Paid-In Capital, and Retained Earnings. The formula for common stock is
First Case: total equity, treasury stocks, paid-in capital, preference stocks, and retained earnings.
Total Equity + Treasury Stocks + Paid in Capital + Preferred Stocks + Retained Earnings
Second Case: Total Equity and Retained Earnings
Total Equity-Retained Earnings
Deducting retained earnings from total equity gives us the value of the common shares.
Exemples of Common Stock Calculation
We will try to explain how to calculate common stock through examples, so that you can figure them out easily.
Example 1: A company’s balance sheet for the year ended December 31, 2011 shows Total Equity=$45,0000000.
$10,0000 Preferred stock
15,0000000 $ paid-in capital
5% Retained Earnings
Using this information, we can calculate common stock using the formula:
Total equity + treasury stock + paid-in capital + retained earnings
So the company’s common stock remains at $26,0000000.
Assume a corporation has total equity of $67,000,000 and retained earnings of $27,000,000 as of December 31, 2010. Add Common stock.
$270000 Retained Earnings
total equity-retained earnings
In 2010, the company’s common stock was worth $40,0000000. (case 2)
Common Stock Parts: A Common Stock has various parts. For example, approved capital, issued shares, and treasury stocks.
Authorized Capital: The maximum number of shares a person, insider or outsider, can purchase.
Shares issued to the public are called issued shares. The issued share can’t exceed the permitted.
Treasury Stocks are held in a company’s treasury and never released to the public.
Outstanding Shares: Outstanding shares are the shares of a corporation that are not yet issued. Subtraction of Treasury Stocks from issued shares yields outstanding shares.
Number of issued shares-Treasury stocks
Assume the corporation has 10,000 shares issued.
2,000 Treasury Stocks
Common stock formula terms:
Total Equity is the company’s total net value or capital. Deducting liabilities from assets produces the company’s total equity.
+ Total Assets – Total Liabilities
The outcome should be positive. If it’s favorable, the company will last a long time. If it’s negative, the company is doomed to fail. A company’s assets must outnumber its liabilities to survive.
For dividends, preferred stocks provide investors a head start over common stockholders. When a corporation provides dividends, it pays preferred stockholders first, then common stockholders if any remain.
Additional Paid-in Capital is the excess earnings over the per-share value.
The Additional paid-in capital formula is:
Shares issued* (issued share price-par value of that share)
For example, a $100 share has a $20 par value, thus you need $20 to buy it. Shares are bought at par value.
The additional paid-in capital for a corporation is 200*($100-$20).
$16,000 paid-in capital
After paying out dividends to all shareholders, a company’s remaining earnings are known as Retained Earnings.
Treasury Stocks are preserved or restored corporate stocks retained in the treasury. These corporations buy back shares from investors or issue new stock.
So these terms are important in calculating common stock. We hope this helps you calculate common stock and gives you useful information.
Investors buy common stocks to earn a high rate of return.
The advantage of common stocks is that investors get voting rights. One stock equals one vote. When left, they get dividends. Preferential dividends go to preferred stock holders before common investors in a bankruptcy. The common stockholder gets nothing if the corporation has no dividend remaining after paying all other holders. Investing in common stocks becomes risky. Our finance professionals will help you with your finance assignments.