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Equity | March 02
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Learn everything about Shareholders equity and equity investment

Any organisation’s financial records predominantly comprise three main elements, viz. liabilities, assets and shareholders equity. All these elements are equally important in evaluating the financial soundness of the firm or organisation. This helps investors to calculate the sustainability of the firm in the near future. Equity investment comes with multiple benefits, if done smartly. To better understand shareholders equity and how equity investment can prove to be a lucrative investment option, below we have provided detailed information about both the aforementioned factors. 

Shareholders Equity: Defined

Shareholders Equity or SE is computed by the net worth of the company. This net worth is obtained by the nature in which the shareholders of the company can claim the residual assets, once the overall debt has been successfully paid off. This calculation takes place by calculating the difference between the gross liabilities and the gross assets. 

In this respect, the earnings retained by the company are also incorporated under the ambit of shareholders equity. These retained earnings are not disbursed as dividends to the shareholders of the company, rather it is reinvested to cultivate the growth of the organisation.  

However, one must not confuse the shareholder value of a company with its value of liquidation. This is because, at the time of liquidation, the physical asset value of a company is considerably diminished and certain other incredible aspects are considered. 

The process of calculating shareholders equity

There are many formulas available to compute the shareholders equity of an organisation. Here, we considered the most commonly used formula to calculate the SE. 

Shareholders equity (SE) = Gross Assets - Gross Liabilities 

This is one of the most basic accounting formulae that involves the addition of current and long term assets of the firm and the addition of the long term and current liabilities followed by subtracting the total of assets from the sum total of liabilities. 

Steps for calculating the SE of a company 

Now that you know the formula for calculating shareholders equity, you need to know the steps to calculate it for a given firm. These are given below. 

  • Take the balance sheet of the preferred company and look for its overall assets of the current period.

  • Calculate the total liabilities, which is usually provided under a separate column in the balance sheet. 

  • Look for the overall SE of the company in the balance sheet and add it to the calculated total liabilities. 

  • The total assets will be equal to the total equity and the liabilities’ sum. 

What can shareholders equity indicate?

The shareholders equity of a company can be of two types, namely positive and negative. Shareholders equity is considered positive when the surplus assets of the company surpass the total liabilities of the company. The shareholders equity of a company is considered to be negative when the total liabilities surpass the total amount of assets. If the shareholders equity continues to stay negative, the company is likely to become bankrupt leading to the ruination of the company’s balance sheet. 

This is one of the principal reasons that dissuade investors from investing in SE that are negative in nature, denoting that investing in the respective company can entail risks in the near future. However, taking help from leading depository participant LKP Securities will help you to discern between positive and negative SE as they have certified years of skilled knowledge and experience. This enables individuals to smoothly invest in SEs that are positive in nature and has a reputation for sustainability. Leaning on such a well-known stockbroker is crucial as the shareholder equity of the company is not the only element in calculating the financial soundness of a company. There are other factors too that is crucial in determining the financial strength of any given company. 

However, SE stands to be one of the most pertinent metrics in gauging the return on investment of an equity investor. For instance, shareholders equity is an essential element for calculating the return that is likely to be earned from the equity investment. As a result of this, an investor can evaluate the effectiveness of the firm in employing investor’s equity for generating revenues. 

Why you should make an equity investment

Individuals invest in equity anticipating an upsurge in the value of the company in the nature of capital gains or in the generation of company dividends. When the value of equity investment escalates, the equity investor is likely to obtain the monetary difference as a result of the company selling of their shares or by liquidating the assets of the company to pay off its obligations. Equity investment is very beneficial for an investor, as it boosts the asset allocation of the investor’s portfolio by diversifying the portfolio. 

How can one benefit from equity investments?

There are plenty of reasons for investing in shareholders equity. Some of these are given below. 

  • By investing in a shareholders equity an investor can expand the value of his invested principal amount. This surge in the principal amount is gained in the form of either dividends or capital gains. 

  • By investing in a shared holder’s equity an investor can obtain a more diversified investment plan even for the minimal amount invested initially. 

  • The diversification offered by shareholders equity is difficult to obtain through an equity fund as it involves a significantly greater investment of principal capital. 

  • Investors also get the option of enhancing their investments with the right shares when the company is willing to raise surplus capital in the shareholders equity market. 

By now, you must have understood the lucrative investment opportunities in shareholders equity. But for investing in the right kind of company for better portfolio diversification and to earn a better return on investment, an investor needs the right kind of guidance. Thereby, prospective investors must lean on credible and proficient stockbrokers like LKP Securities who can provide you with an absolute idea about the companies whose shares are faring well in the market and can prove profitable comparatively safer investment option in the long run.

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