Stockholder's Equity: Definition & Formula

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  • 0:00 Overview of Stockholder Equity
  • 0:45 Definition of…
  • 1:51 Formula for Stockholder Equity
  • 3:02 Lesson Summary
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Lesson Transcript
Instructor: Michael Cozad

Michael is a financial planner and has a master's degree in financial services.

This lesson will provide an overview of stockholders' equity. Whether you invest in a company now or intend to in the future, you are likely to come across stockholders' equity at some point, so this lesson will define the term and provide the formula for your reference.

Overview of Stockholders' Equity

Maggie Moneybags just retrieved her mail from the post office and found a letter she's been waiting for -- her first retirement plan statement has arrived! You see, Maggie just recently started contributing to her retirement plan at work. The people who run the plan let her pick how she wants her retirement money invested.

Just this past month, Maggie's employer withheld $100 from Maggie's paycheck and put it into her retirement account. She decided to invest it in ABC Mutual Fund, and her statement shows the top five stocks in which ABC Mutual Fund has invested her money. Maggie is most interested in the top holding, a company called MNO Corporation. Since Maggie now owns part of this company, she wants to know more about it!

Definition of Stockholders' Equity

Maggie goes to her favorite search engine, Yagoog, and types in MNO Corporation. She is directed to the finance section of Yagoog, where she goes to the financial section of the company. She finds a balance sheet. How does Maggie know how to do this? She keeps her personal finances on a net worth statement and knows that a company's balance sheet is its version of a net worth statement. Since she wants to know what the company owns and what it owes, she looks at the balance sheet.

On that balance sheet, she sees three headings: assets, liabilities, and stockholders' equity. What is actually owned by the company (and its investors, like Maggie) is the difference between the assets and liabilities, or the stockholders' equity.

Keep in mind that assets are things the company owns and liabilities are what is owed, like loans. Stockholders' equity includes things like what the investors gave the company to start it in exchange for stock (paid-in capital), any donated money or other assets, and the earnings the company has kept for itself and not paid back to its investors as a dividend (retained earnings).

Formula for Stockholders' Equity

Whew! That was a lot of terms in a very short amount of time. Let's put some of the terms in action by going over the formula for stockholders' equity. Let's check in on Maggie and see what she finds out.

Maggie is staring at her computer screen and MNO Corporation's balance sheet. Her screen shows:

Assets: $16,000,000

Liabilities: $3,000,000

Stockholders' Equity: $13,000,000

Maggie notices that if she subtracts liabilities from assets, she gets the stockholders' equity number. Could this be right? Yes!

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