Corporate Finance: Define Common Stock Equity
Common stock equity represents ownership rights to a corporation. Intelligent investors remain very well versed in regards to corporate structure and shareholder privileges, before committing large amounts of capital towards purchasing stock.
Common stock equity investments do carry particular risk versus reward profiles, which are distinct to this asset class. Stocks, as an extension of business ownership, have proven to be the best asset class, by far, for building long-term wealth.
The corporation is the most common form of business organization and is chartered according to state law. The corporation is granted its own legal rights, as an entirely separate entity from its owners. As such, corporations offer limited liability, meaning that owners are only responsible for their own capital put into the business.
Alternatively, in a sole proprietorship, all of the owner’s personal assets are fair game – and stay left on the table for settling lawsuits and bad debts.
To raise cash, corporations both issue debt and sell stock. Investors put up cash, in exchange for shares, or ownership stakes over the underlying business.
Common stock does carry voting rights, but property claims are subordinated to those of creditors and preferred shareholders. In the event of bankruptcy, assets will be liquidated [sold off], and bondholders are to be paid first. As such, stock market prices are relatively volatile and will largely move in accordance with corporate profitability.
Corporations are structured to merge the respective aims and goals of owners and management together. Investors elect a chairman and board of directors. In turn, the board hires a chief executive officer and management team to operate the business.
C-suite executives and employees are often times compensated with stock options that should appreciate in value in conjunction with business performance. Executives must not sabotage the long-term viability of the firm for immediate gain.
The Balance Sheet
The balance sheet is best described as a snapshot of corporate financials. Here, assets are equal to liabilities plus shareholder’s equity. Cash, investments, patents, and property, plant, and equipment are assets kept on the books to generate income.
On the other side of the equation, short-term debt, bonds, and mortgages may be carrying these assets. Shareholder equity, or ownership, is what remains after settling creditor claims. Ex: Home Equity = Property Value – Mortgage Balance.
Shareholder equity includes shares of common stock outstanding, treasury stock [buybacks], and reinvested earnings. Return on equity, or the ability to convert equity into real profits, is one of the foremost statistics in all of business.
For Onyx Investments, Apple, Nike, Visa, and Google have emerged as our most productive long-term holdings, with each of these corporations showing staggering returns on equity throughout time. We invest by identifying and buying into shares of the best businesses.
Onyx Investments is no casino – and leaves little to chance.