October 27, 2020
By Rahul Iyer
Types of equity refer to the different categories of shares or ownership available in a company. Large companies will offer different levels of equity. This is done to appeal to people of different income levels. Some of the most common forms of equity are common stock, preferred shares, contributed surplus, retained earnings, and treasury stock. In this article, we will discuss each.
The ownership that an investor holds in a corporation is referred to as equity. After corporations clear their financial obligations or debts, the income is then divided into shares.
The value of a share or equity is based on a number of factors. The earning potential of the business is critical to determining the value of its equity. Here are some of the factors considered when determining a company’s earning potential:
The economic conditions in which the corporation operates
National and international economic climate
The corporations forecasted earnings
The projected growth of the corporation
Where the entity is in terms of development
Let us discuss some of the common forms of equity.
This is also referred to as common shares. This represents ownership of a corporation. Common stockholders are given the right to vote and an obligation to certain assets of the company. The value of common shares is determined by multiplying the par value of the stock by the total number of outstanding shares. Company earnings are distributed to common shareholders through capital gains and dividends.
These are shares offered to investors by entities with established dividends and common stocks. If a company falls into financial challenges, preferred stock dividends are typically issued before common shares. Many companies give the holders of preferred stock added benefits to entice investors.
When investors pay more than the par value of a given share, this is called a contributed surplus. Another name for this is additional paid-in capital. This amount fluctuates based on the company’s performance.
Company Earnings that are not paid out to their various stakeholders in the form of dividends are referred to as retained earnings. In other words, retained earnings refer to money that a corporation keeps after they would have fulfilled all financial obligations. This money is either reinvested or saved for future use.
When a company buys back equity from common stockholders this is referred to as treasury shares. The value of these shares is noted in an account called treasury stock.
There are other forms of equity such as private equity, home equity, brand equity, and others.