Common Equity

May 2, 20222 min read
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Large corporations and companies will oftentimes allow investors to purchase common stock or shares of the company. The common equity thus refers to the total amount of investments in a company made by the common equity of investors.

The common equity can include the value of all shares of common stock, earnings, and paid-in capital.

The dollar value

Common equity in some instances can be referred to as the dollar value or dollar amount of common shareholders’ investment.

Important terms to remember

Common equity by itself houses a set of terms that one should know and understand to have a firm grasp of the broader term.

Common shares: Companies can offer investors two different types of shares, either common or preferred. In this case, common shares entitle the shareholders to a percentile vote on company operations and are subject to dividends.

Retained Earnings: In the most simple definition, Retained earnings refer to the reinvestments made by the company. These earnings are not paid out in dividends to the shareholders.

Paid-in Capital: Excess capital obtained through company stock par value. This is for example if a company issues stock at a par value of $10 per share, but sells it to investors at $25 per share. Their balance sheet will indicate $10 in common stock and an additional $15 paid-in capital for each shareholder.

Why is common equity used or important?

  • Provide initial startup capital and funding
  • Attract additional investors and shareholders
  • Act as a buffer when cash flow is limited

Common equity helps both the company and the shareholder take part in the potential future growth of the company and its value return in the long term.