How To Calculate Common Stock – Formula With Examples
When a company goes public from private, it offers an opportunity for investors to claim partial ownership in the company by buying its stocks. This initial offering is known as IPO and this is when the company becomes a publicly owned company.
The more stocks you own of a particular company, higher is the ownership percentage in that company. How much percentage of the company you own depends on the total number of outstanding stocks.
In this article, we will list you the various aspects of common stock calculation. You will learn how to calculate the total number of outstanding stocks, ownership percentage in a company, representing common stocks on balance sheet, and finding the book value of per share of common stock.
How To Calculate Common Stock With Formula
From the balance sheet of the company, you can find the total number of shares issued by that company. The balance sheet is comprised of equity and liability. Common stocks are listed in the equity section because stocks are considered as an asset.
From the total number of stocks, we can calculate the number of outstanding stocks. Outstanding stocks are stocks that are issued to the public and owned by stockholders, investors, and company members.
If we deduct the number of treasury stocks from issued stocks, we can find the number of outstanding stocks. Treasury stocks are stocks that have been repurchased by the company that issued the stocks in the first place.
These shares have no voting rights or dividend payments. Neither does this stock receive any assets after the company liquidates.
To summarize the formula,
Outstanding stocks = Issued stocks – Treasury stocks
Common Stock Calculation Example
To understand this better, let us look at an example: A company issues 50000 shares to the public. This is the number of issued shares.
However, the company decides to buy back 3500 of these shares. Therefore, these shares become treasury stocks. Therefore, the total number of outstanding stocks is equal to:
Outstanding stocks = 50000 – 3500 = 46500 stocks.
Sometimes, companies don’t issue all the authorized stocks. Consider another example. ABC Corporation has 10000 authorized shares. Out of which the company decides to issue 8000 shares and buys back 2000 shares.
In this case, the total number of outstanding stocks = 8000-2000 = 6000 stocks
Calculate Common Stock On Balance Sheet
Common stocks are listed in the balance sheet under the stockholder equity section. The balance sheet is comprised of three elements: Assets, Liabilities, and Stockholder equity.
The general equation of the balance sheet is as follows:
Assets = Liabilities + Equity
The claims on a company’s assets are comprised of liability and equity. Liability includes the claims on the company’s assets by external firms or individuals. Mortgage and loans are examples of liabilities of a company.
Equity is the claim of shareholders claims on the company assets. By purchasing stocks of the company, they have the right to claim ownership in the company. Their ownership percentage is determined by the ratio of shares owned to the total number of outstanding shares.
Example: Mark is an investor who owns 33,000 common stocks of XYZ Corporation. To find out how much percentage of XYZ is owned by Mark, we need to find the total number of outstanding common stocks of the company.
If there are 500,000 outstanding common shares, then Mark’s ownership percentage is calculated as follows:
Ownership Percentage of Mark = (Number of common stocks owned by Mark / Total number of Outstanding shares) * 100%. Substituting the values in the formula, we get (33,000/500,000)*100% = 6.6% Therefore, Mark owns roughly 7% of XYZ.
Keep in mind that equity is not just comprised of common stocks. It also includes retained earnings, treasury stock, and preferred stocks.
When you add up the liabilities and stockholder equity, their sum will always be equal to the total value of the company’s assets.
To summarize, common stocks are listed under the equity section of the company balance sheet. From here, you can find the total number of outstanding common stocks.
Calculate Book Value Of Common Stock
The book value of one common stock is the amount of asset that each share of common stock embodies.
As we mentioned above, stockholder equity consists of both common and preferred stock. But in this article, we are only concerned with calculating the book value of the common stock.
If we assume the simple scenario first where the company has issued only common stocks and no preferred stocks, then our calculation becomes simple. In this case, the stockholder’s equity becomes equal to the value of common stocks and retained earnings.
Retained earnings are the profits earned by the company that is not paid as dividends to the stockholders.
If Company Issues Only Common Stock:
The formula for calculating the book value per share of common stock is:
Book value per share = Stockholder’s equity / Total number of outstanding common stock
For example, if there are 10,000 outstanding common shares of a company and each share has a par value of $10, then the value of outstanding share amounts to $100,000.
If the company had retained earnings of $23,000, then the total stockholder’s equity amounts to $123,000.
We can now calculate the book value per share.
Book value per share = $123,000 / $10,000 = $12.3 per share of common stock.
If Company Issues Both Common Stock & Preferred Stock
In this case, we need to factor in both common stock and preferred stock in the calculation. If we consider the same example, only this time the company issued 2000 preferred stocks at $30 per share.
The preferred stocks have a 5% return rate.
Earlier, the stockholder equity amounted to $123,000. If we add in the total value of preferred stocks ($60,000),
The new stockholder equity amounts to: $100,000 + $23,000 + $60,000 = $193,000. Arrears amount to $3000
The new formula for book value per share = Stockholders Equity – (Preferred Stock + Arrears) / No. of shares outstanding
Substituting the calculated values, we get
Book Value per share = {$193,000 – ($60,000 + $3000) / 10,000} = $13 per share of common stock.
Final Words
The aim of this article was to make the calculation of common stocks easy and simple to understand. We learned to calculate the number of outstanding stocks from the number of issued and treasury stocks.
This was demonstrated using an example. Next, we learned how to represent common stock on a balance sheet and how to find out how much percentage of stocks you own in a company.
Finally, we learned to calculate the value of common stock in two different cases. If you are an aspiring stock investor, you must be familiar with these calculations to understand what you are doing better.
