Are you confused on how to calculate common stocks in an effective way.Don’t worry here we will provide you easy formula steps and description to calculate common stock.
Here we will guide you regarding common stock and provide you the tips on how to calculate common stock, but before that, we should know some basic information about stocks.
What are Stocks?
Stocks are the share of a company that can be purchased by anyone who wants to invest in the corporation. A corporation sells its shares in order to make money from the individuals so that it can invest this money in the further progress of the corporation. In replacement, the company provides voting rights to the stockholders and the dividends when it is issued.
In simple words, stockholders are the partial owner of the company and get dividends and voting rights from the company based on their percentage of stocks they have purchased.
Types of Stocks–There are two types of stocks.
- Common Stocks
- Preferred Stocks
1.Common Stocks– An investor can purchase both types of stocks when available as both have their own privileges. But common stocks are the share that most people invest in. One share allows one vote to the buyer. When people purchase common stocks, it means they have voting right in the important decisions and other events in the company. They also get dividends when issued by the company but do not have a preference to get it.
2. Preferred Stocks– When a person invests in the Preferred stocks, he or she is preferred over common stock investors in terms of getting dividends from the company. The downside of the preferred stock is that preferred stockholders do not have a right to vote.
Here we will discuss how to calculate common stocks, and preferred stocks also play a role in calculating common stocks.
What is dividends-Dividend is a reward, money, stocks which are distributed among the shareholders of that company. Dividends are decided by the board of directors and need the approval of shareholders.
Common stocks are represented in the stockholder equity section on a balance sheet. Now before knowing further about common stocks, have a look at a balance sheet.
What is a Balance Sheet?
The balance sheet is a company’s financial statement. It represents the assets, liabilities, and stockholder’s equity at a particular point in time. It records the company’s income and expenditure and compares it with the previous year’s data, and results out the company’s net profit and loss. Let us explain to you with the help of a table. Suppose it is a balance sheet having three sections.
|All the items company own for the growth of the company||Debts and obligations that a company owes and paid back later in the future.In the liability section common stocks are represented in the shareholders equity section.|
Now when we know the basic terms, it is time to jump on how to calculate common stock. To calculate common stocks, we have a formula; after using this formula, it will be easy for you to get common stock value:
Common stock can be calculated when the Treasury Stocks are added in the Total Equity and Preferred stock, Additional(paid-in )capital, Retained earnings are subtracted from it. The mathematical formula of common stock is
First Case: when total Equity, treasury stocks, additional (paid-in) capital, preferred stocks, and retained earnings are given.
Common Stock=Total Equity+Treasury Stocks-Additional paid in capital-Preferred stocks-Retained earnings.
Second Case: when only total Equity and retained earnings are given:
Common Stock=Total Equity-Retained Earnings
when we were given the total Equity and Retained earnings, then by deducting retained earnings from the total Equity will provide us with the value of the common stock.
Examples On How to Calculate Common Stock:
By considering examples, we will try to explain how to calculate common stock and hope that it will be easy for you to figure them after this.
Example 1: Suppose a company give details as on the balance sheet in a financial year of december 31, 2011 , and it tells us Total Equity=$45,0000000
Additional paid-in capital=$15,0000000
Solution: Now from this data, we have to calculate common stock by using the formula:
Common stock= Total Equity+Treasury stock-Additional (paid-in)capital-preferred stock-Retained earnings
So after calculation common stock of the company remains at $26,0000000.(Case 1)
Example 2. let us a company have total equity=$67,0000000 and Retained earnings=27,0000000 for a financial year December 31, 2010. Now calculate Common stock.
Solution: Total Equity=$67,0000000
then Common stock=Total equity-Retained Earning
So the common stock of that company stood at $40,0000000 for the year 2010(case 2)
Parts of Common Stock: There are different parts of a Common Stock. For example, authorized capital, issued shares, treasury stocks, and outstanding shares.
Authorized Capital: These are the maximum shares of a company that a person, either insider or outsider, can invest in.
Issued Shares: These are the shares that a company issues to the public. The issued share cannot be greater than the authorized shares.
Treasury Stocks: These stocks are never issued to the public and always keep in a company’s treasury.
Outstanding Shares: Outstanding shares are the shares that are distributed between all shareholders of a company. When Treasury Stocks are subtracted from the issued shares, it gives us the outstanding shares.
Outstanding Shares=Number of issued shares-Treasury stocks
Suppose the no. of shares issued by the company=10,000
The stocks it kept in the treasury=2,000
then the outstanding shares are=10,000-2,000=8,000
Terms used in the common stock formula:
Total Equity: Total Equity is the total net worth or capital of the company. When the liabilities are deducted from the assets, it gives the total equity of the company.
Total Equity=Total Assets-Total Liabilities
The result should be in positive terms. If it is positive, it means the business will survive for a long time. In contrast, if it is negative, it means the business has a short life span or cannot survive in the long term. For the survival of a business, assets should be more than liabilities.
Preferred stocks:As the name suggests preferred stocks are the share purchased by an investor given preference over common stockholders in terms of dividends. When the company issues dividends, it distributes them to the preferred stockholders first and if left any then it gives to the common stock investors that’s why these are called preferred stocks.
Additional Paid-in Capital: It is the profit that a company earns over the per-share value.
The formula for the Additional paid-in capital is-
Number of issued shares*(issued share price-par value of that share)
For example, the share is issued at the cost of $100, and its par value is $20, which means you should have a minimum amount of $20 to purchase the shares. Par value is the minimum value to buy a share.
Suppose a company-issued 200 shares, the Additional paid-in capital for it=200*($100-$20)
Additional paid-in capital=$16,000
Retained Earnings: When a company distributes the dividends between all the company shareholders, it is left with a saving amount called the Retained Earning of this company.
Treasury Stocks: These are the saved or restored stocks of any company which are kept in the company’s treasury. These stocks companies repurchase either from the investors or from the issued stocks.
So all these terms play a key role in how to calculate common stock. We hope now it is easy for you to calculate common stock and you get valuable information on this topic.
Investors invest in common stocks to generate income at a high rate.The advantage associated with the common stocks that holders acquire a voting right. Single stock provides one vote. Dividends are also offered to them when left. In case of bankruptcy, all preferred stockholders, bondholders, creditors get their dividends before the common stockholders. If the company does not have any dividend left after paying off all other holders, the common stockholder will get nothing. In such situations, it becomes risky to invest in common stocks. Here you will get finance assignment help from our assignment finance experts.