Stockholder's Equity Defined

• If a company were a person, its stockholder's equity would be called net worth. SE is the difference between the company's liabilities -- what it owes to creditors and bondholders -- and its assets -- the stuff it owns that can be sold for some value. Obviously, a positive number is good, as it means that the company is making a profit, but SE can change over time as the business fluctuates, for all kinds of legitimate reasons. This is why financial reports include a Statement of Stockholders Equity that shows changes in this number over the reporting period, typically one year or more.
  
  

Company Assets

• SE begins with assets. This category includes everything from supplies and equipment to intangible items like patents and trademarks. It's important to note that this does not include items that have no value, and companies depreciate, or reduce the value, of some assets over time. In the same way, the value of intangible assets may be estimated, since the value of an asset like a trademark is only as high as the market's perception of the brand.
  
  

Company Stock

• Stock may also appear as an equity on the balance sheet and in statements of SE, and it can appear in three forms. The company's outstanding common stock is typically shown with little to no value, although cash from the sale of new shares is added to total equity. The sale value of preferred stock sold to new investors is also an addition to equity. Treasury shares are common stock shares that have been repurchased by the company and represent a decrease in SE.
  
  

Retained Earnings

• When a company makes a profit, it can pay that profit out to owners or keep it to reinvest into the business. Most companies do some of each, and this affects SE as well. Anything the company keeps is known as retained earnings and increases SE. Profits paid to shareholders are called dividends and decrease SE. Throughout the year, a company may spend a portion of its retained earnings on company expenses. While this may seem like a decrease in SE, if the money is properly spent it will increase assets and/or profit, both increases to SE.
  
  

Liabilities

• Liabilities decrease shareholder equity, because they reflect obligations to others. This includes loans and any bond issues the company may have. It may also include taxes owed and expenses incurred but not yet paid.