What is Shareholders Equity?

In the standard accounting equation, when all company liabilities are subtracted from company assets, the remainder is called shareholders equity.

What this means is that in the event that the company were liquidated, all debts would be serviced first, including bonds issued by the company, and the remaining balance would be divided amongst shareholders. If a company has a respectable debt-to-equity ratio, it can improve the appeal of a company’s stock and lead to a higher market price for the shares.

Shareholders equity is the amount on a company’s balance sheet that remains after all liabilities have been subtracted from a company’s assets. For stockholders, this is encouraging because it means that they will be likely to get something for their shares if the company is liquidated or perhaps if an offer is made to existing shareholders in the event of a merger or acquisition.

It basically means that stock shares have an inherent value. The market value of a stock may increase from there, because there is a demand from investors for companies with strong fundamentals. Looking at the books of a company and their position in the market in relation to their peers is known as fundamental analysis.

Many investors, especially older investors, made decisions for their portfolio based on fundamentals. Today, many investors make short-term decisions in the market that are based on technical analysis methods which use price and trade volume to make decisions based more on the market demand for a security rather than the fundamentals of the company behind the stock.