Investor Perspective on Equity Section Items - Business Finance 25300

This essay discusses the importance of various items within the equity section of a company's balance sheet from an investor's perspective. It highlights key components such as treasury stock, additional paid-up capital, preferred stock, retained earnings, and common stock, elaborating on how each item influences investor decisions and market dynamics, particularly within the context of the Saudi Arabian stock market and its Vision 2030 initiative. The analysis includes the role of retained earnings in assessing management's investment strategies, the impact of treasury stock on shareholder equity, and the risk-return considerations associated with preferred versus common stock. The essay also touches upon the influence of investor sentiment and various stock valuation methods on market prices, providing a comprehensive overview of the equity section's significance in financial analysis and investment decisions.

25300 fundamentals of business finance

Importance of items of the equity section in the balance sheet
The equity section includes several items that are very important as per the investors point of
view. Items such as treasury stock, additional paid-up capital, preferred stock, retained earnings,
common stock is included in the equity headings. According to Ball et al. (2020), when an
investor analyzes the retained earnings portion of any company they analyze how wisely the
company investor and deploy the stakeholders money. The investor examined the amount of
money invested by the management in the business for its expansion. Another item is treasury
stock which the company buys back from the market or the existing shareholders. According to
Hill, Price & Ruch (2018), the companies either dispose of the shares to increase the
shareholdings of the investors. The shareholders are reduced by the treasury shares bought by the
firm. For accounting purpose, treasury stocks are accounted by two methods such as par value
and cost method. The par value of any company shares is reflected by the common stock of that
company and the excess amount received by the company over Par amount of the shares is
reflected by an account named additional paid up capital. Another important item is preferred
stock which carries less risk when compared to common stock. According to Boudry, Deroos &
Ukhov (2016), shareholders of Saudi Arabia gives priority to common stock when they have to
select one of the stocks between common and preferred stock. The main advantage of preferred
stock is that they are paid before other stock at the time of liquidation of any business. The
investors who invest in preferred shares get high rate of dividend from the s the firm. Zakat is
also considered an essential item in the equity section. It is not included in the income statement.
The largest share market of Saudi Arabia is located in the region of Gulf. To reduce the stability
in the market the foreign investors are invited to invest in the stock market of Saudi Arabia. The
Saudi Arabia vision of 2030 was announced by Mohammad Bin Salman in 2016 to develop the
economy of the country and also to implement cultural and social reforms. Foreign direct
investment was promoted in Saudi Arabia to fulfill the vision of 2030. When investor sell and
buys the stock from the open market of Saudi Arabia the market prices fluctuate. The price falls
when investors decided to sell their shares and price goes up when the shares are acquired by the
equity and preference shareholders. Investors generally purchase shares when they analyze that
price of shares will increase in the future. According to Al‐Hadi et al. (2017), the sentiment of
Saudi investors drives the value of company stock. When a company grows and is paying huge

dividend then the investors invest in that company which leads to an increase in the demand for
that company shares and the price of firm shares goes up. There are different methods that are
applied to predict the price of stock or portfolio of the firm such as dividend discount method
and Gordon growth method. The investors and the shareholders generally acquire the stocks
from share market of Saudi Arabia when the market is bullish and dispose of when market tends
to bearish.

References
Al‐Hadi, A., Hasan, M. M., Taylor, G., Hossain, M., & Richardson, G. (2017). Market risk
disclosures and investment efficiency: International evidence from the Gulf Cooperation
Council financial firms. Journal of International Financial Management &
Accounting, 28(3), 349-393. [Avaliable at
https://espace.curtin.edu.au/bitstream/handle/20.500.11937/39041/246349%20AlHadi.pd
f?sequence=2&isAllowed=y] [Accessed on 29th January 2020]
Ball, R., Gerakos, J., Linnainmaa, J. T., & Nikolaev, V. (2020). Earnings, retained earnings, and
book-to-market in the cross section of expected returns. Journal of Financial
Economics, 135(1), 231-254. [Avaliable at
https://pdfs.semanticscholar.org/4bc0/2ef6f4d8103b782101585bf7983e9936e26d.pdf]
[Accessed on 28th January 2020]
Boudry, W. I., Deroos, J. A., & Ukhov, A. D. (2016). Diversification benefits of reit preferred
and common stock: New evidence from a utility‐based framework. Real Estate
Economics. [Available at https://scholarship.sha.cornell.edu/cgi/viewcontent.cgi?
article=1001&context=workingpapers] [Accessed on 30th January 2020]
Hill, M. S., Price, R., & Ruch, G. W. (2018). Financial Reporting Alternatives for Stock
Repurchases and Their Effects on Stock Repurchase Decisions. [Available at
https://cob.unt.edu/sites/default/files/docs/acct/accounting-conference/Financial
%20Reporting%20Alternatives%20for%20Stock%20Repurchases%20and%20Their
%20Effects%20on%20Stock.pdf] [Accessed on 27th January 2020]