5. Shareholders’ Equity

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Do curso por Indian School of Business

Trading Basics

374 classificações

Indian School of Business

Trading Basics

374 classificações

Curso 1 de 5 em Specialization Trading Strategies in Emerging Markets

The purpose of this course is to equip you with the knowledge required to comprehend the financial statements of a company and understand the various transactions that take place in the stock market so that you can replicate the strategies discovered by the extant academic literature. The first part of the course provides a brief introduction to financial statements and various common filings of firms. You will learn how to obtain information regarding a company's performance from them and use the information to build trading strategies. Next, you are taught basic asset pricing theories so that you will be able to calculate the expected returns of a stock or a portfolio. Finally, you will be introduced to the actual functioning of asset markets, type of players in the market, different types of orders and the efficient ways and opportune time to execute them, trading costs and ways of minimizing them, the concept of liquidity .etc. This knowledge is required to develop efficient algorithm to execute various trading strategies.

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Basics of Financial Statements

This module provides a brief introduction to financial statements and various common filings. These are the most important sources for obtaining information regarding a company's performance. Most strategies are indeed based on financial statements. After completing this module you will be able to get the important details from the balance sheets.

1. Introduction to accounting5:28

2. The balance sheet3:37

4. Liabilities5:04

5. Shareholders’ Equity4:56

6. Income Statement4:46

7. Expenses 17:31

8. Expenses 26:42

9. Statement of Cash Flows4:31

10. Cash Flows from Operations9:51

11. Cash Flows from Investments and Financing6:35

Conheça os instrutores

Ramabhadran Thirumalai
Assistant Professor
Indian School of Business

[MUSIC]

Last time, we talked about the liabilities part of the balance sheet,

which is one of the ways the company raises resources.

In this video, we will discuss where a company gets the remaining part of these

resources from, namely the shareholders' equity.

We will discuss in detail the different components of shareholders' equity,

namely preferred equity, common equity, treasury stock and retained earnings.

We will continue to use Amazon's balance sheet from December 2015 to

better understand shareholders' equity.

Shareholders' equity also referred to as net worth.

It represents the total equity interest of all the companies shareholders.

It mainly includes preferred equity, common equity, treasury stock and

retained earnings.

The most important form of equity is common equity.

Shareholders' having common equity have voting rights and

hence, other companies owners.

They have the right to select the board of directors, which then appoints

the different CXOs who in turn manage the day to day operations of the company.

At the end of 2015, Amazon had closed to 500 million shares of

common stocks outstanding each of the par value of $0.01.

The value of this shares is 500 million times 0.01 which equals $5 million.

When a company sends common shares to the shareholders,

the shares are usually sold at the value higher than its par value.

The company receives this premium in the form or cash and

hence it must be recorded on the balance sheet.

This is recorded as additional paid in capital.

It is the premium over the par value that the company receives

at the time of the sale of shares to the public.

Amazon had additional paid-in capital of $13.39 billion at the end of 2015.

Treasury stock represents common stock that a company buys back from

common shareholders or were authorized but was never sold to shareholders.

This recorded at cost.

Amazon had treasury stock worth $1.84 billion.

This amount is deducted from the value of common shares outstanding

as they do not pay dividends, have no voting rights, and

hence should not be included in shares outstanding calculations.

the other form of equity is preferred stock.

It is the investment in the company by preferred stock holders,

they have priority over common stockholders which means that company must

pay them dividends before it can pay any dividends to the common stockholders.

However, preferred stockholders do not have any voting rights in the company.

At the end of 2015, Amazon was authorized to issue 500 million shares

of preferred stock but it had not issued any preferred stock.

So there is no value recorded against preferred equity

on Amazon's balance sheet.

The other important component of shareholder's equity on the balance sheet

is retained earnings.

This is an aggregate of undistributed profits across all years.

The manager has discretion as to how much, if any, of the profits a company makes

should be distributed to shareholders, both common and preferred as dividends.

Any part of the profits that is not paid out as dividends

Is added to the balance sheet as a part of retained earnings.

Profits are computed on the income statement,

which we will look at in greater detail later in the course.

Amazon had retained earnings of $2.55 billion at the end of 2015.

Amazon shareholder's equity also includes other accumulated comprehensive loss for

$0.72 billion.

Its annual report states that this represents unrealized gains and

losses from investments in cash, cash equivalence and marketable securities.

Adding all the different items under share holders equity

Amazon's total shares holders equity was $13.3 billion.

Add this to its total liabilities of 52.06 billion gives us

a total of 65.44 billion which equals its total assets.

So Amazon's uses of resources exactly matches its sources of resources.

We have talked about the balance sheet in the last few videos.

Next time we will start looking at the income statement.

[MUSIC]

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