Common Stock Formula

Common Stock Formula (Table of Contents)

• Formula
• Examples
• Calculator

What is Common Stock Formula?

The term “common stock” refers to the type of security for ownership of a corporation such that the holder of such securities has voting rights that can be exercised for various corporate events. Examples of such events include a selection of the board of directors or other major corporate decision. The formula for common stock of a company can be derived by deducting preferred stock, additional paid-in capital, retained earnings from the total equity, while adding back the treasury stock. Mathematically, it is represented as,

However, in some of the cases where there is no preferred stock, additional paid-in capital, and treasury stock, then the formula for common stock becomes simply total equity minus retained earnings. It is the case with most of the smaller companies that have only one class of stock.

Examples of Common Stock Formula (With Excel Template)

Let’s take an example to understand the calculation of Common Stock in a better manner.

Common Stock Formula – Example #1

Let us take the example of the firm owned by John. As per the balance sheet as on December 31, 2018, the owner’s equity is $50,000 and the retained earnings are $28,000. Calculate the company’s common stock based on the given information.

Solution:

Common Stock can be calculated using the formula given below

Common Stock = Total Equity – Retained Earnings

• Common Stock = $50,000 – $28,000
• Common Stock = $22,000

Therefore, the company’s common stock stood at $22,000 as on December 31, 2018.

Common Stock Formula – Example #2

Let us take the example of a company named FGH Ltd. As per the balance sheet as on December 31, 2018, information is available. Calculate the company’s common stock based on the given information.

Solution:

Preferred Stock is calculated using the formula given below

Preferred Stock = Number of Outstanding Preferred Stocks * Value of each Preferred Stock

• Preferred Stock = 100,000 * $3
• Preferred Stock = $300,000

Treasury Stock is calculated using the formula given below

Treasury Stock = Number of Outstanding Treasury Stocks * Value of each Treasury Stock

• Treasury Stock= 50,000 * $2
• Treasury Stock = $100,000

Common Stock can be calculated using the formula given below

Common Stock = Total Equity – Preferred Stock – Additional Paid-in Capital – Retained Earnings + Treasury Stock

• Common Stock = $1,000,000 – $300,000 – $200,000 – $100,000 + $100,000
• Common Stock = $500,000

Therefore, FGH Ltd’s common stock stood at $500,000 as on December 31, 2018.

Explanation

The formula for common stock can be derived by using the following steps:

Step 1: Firstly, determine the value of the total equity of the company which can be either in the form of owner’s equity or stockholder’s equity.

Step 2: Next, determine the number of outstanding preferred stocks and the value of each preferred stock. The product of both will give the value of the preferred stock.

Step 3: Next, determine the value of additional paid-in capital which the surplus value paid the stock investors over and above the nominal price of the common stock.

Step 4: Next, determine the number of outstanding treasury stocks and the cost of acquisition of each stock. The product of both will give the value of treasury stock.

Step 5: Next, determine the value of the retained earnings as on the reporting date. It is the accumulated account of the profit retained by the business to date.

Step 6: Finally, the formula for common stock of a company can be derived by deducting preferred stock (step 2), additional paid-in capital (step 3), retained earnings (step 5) from the total equity (step 1) and adding the treasury stock (step 4) as shown below.

Common Stock = Total Equity – Preferred Stock – Additional-paid in Capital – Retained Earnings + Treasury Stock

Relevance and Uses of Common Stock Formula

The common stock is very important for an equity investor as it gives them voting rights which is one of the most prominent characteristics of common stock. The common stockholders are entitled to vote on various corporate subjects which may include acquisition of another company, who should constitute the board and other similar big decisions. Usually, each common stockholder gets one vote for every share. Another striking feature of common stock is that these stocks usually outperform another form of securities, like bonds and preferred stocks, in the long run. However, common stock comes with a strong downside, that in case a company goes into bankruptcy, then the common stockholders get nothing until the creditors are fully paid off. In other words, when the company has to sell off its assets, then the cash generated from the sale will first go to the lenders, creditors, and other stakeholders, then the common stockholders are paid if anything is left. As such, common stock is another appropriate example of the trade-off between risk and returns, such that these stocks offer a higher return as they are riskier than another form of securities.

Common Stock Formula Calculator

You can use the following Common Stock Calculator

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