Simply put, stockholder equity, also known as shareholder's equity, is a company's assets minus its liabilities. It can also be thought of as the amount of capital that investors have put into the company, called paid-in capital, in exchange for company shares. A positive difference between assets and liabilities equals a positive stockholder's equity. This is also commonly referred to as the book value of a company. Companies normally list their stockholder equity on the balance sheet, a financial report that also reviews a company's assets and liabilities.
Stockholder equity is comprised of a company's retained earnings—the money it generates that it's able to keep—and of the money that was originally invested in the company. This makes up a third of what needs to be tallied on a company's balance sheet. The other two thirds of information are a company's assets and liabilities. All of these numbers are related, and must add up in order for a company's books to be considered balanced. Accordingly, it may be calculated simply by subtracting the total number of liabilities from the total number of assets. In some cases, it may also be necessary to subtract preferred stock.
Along with being a single figure used to assess the value of company shares, shareholder equity also comprises an entire section listed on the balance sheet. The figures listed within the stockholder equity section represent the different kinds of equity the company is holding. These numbers include preferred and common stock, treasury stock, retained earnings, and capital surplus. These figures represent the kinds of equity held by shareholders, but not necessarily the value within them. The value of the equity is determined ultimately by the difference between total assets and total liabilities. In cases where a company has performed poorly, it may even be possible for liabilities to outnumber assets, resulting in a negative value of stockholder equity.
Aside from subtracting liabilities from assets, stockholder equity can also be calculated using figures only found within the equity section. This can be done by adding a company's shared capital, or capital surplus, to retained earnings and then subtracting the treasury stock. In order for this number to be wholly accurate, one may need to also subtract the difference between the common stock and other stockholder equity held by the company. This method, though effective, is more tedious than simply subtracting total liabilities from total assets.
