Why is it that the preferred stockholders’ equity section of the balance sheet changes only when new shares are sold or repurchased, whereas the common stockholders’ equity section changes from year to year regardless of whether new shares are bought or sold?

Why is it that the preferred stockholders' equity section of the balance sheet changes only when new shares are sold or repurchased, whereas the common stock-holders' equity section changes from year to year regardless of whether new shares are bought or sold?

The preferred stockholders' equity section of the balance sheet changes only when new shares are sold or repurchased because preferred stock is typically issued as a fixed number of shares with a fixed dividend rate. This means that the ownership and dividend rights associated with preferred stock remain consistent unless there is a change in the number of shares issued.

On the other hand, the common stockholders' equity section changes from year to year regardless of share transactions because common stock represents ownership in a company and can be affected by various factors. Here are a few reasons why common stockholders' equity section changes without share transactions:

1. Retained Earnings: Companies often retain a portion of their earnings to reinvest in the business or pay off debts. This retained earnings account contributes to the common stockholders' equity section and increases or decreases based on the company's profitability.

2. Dividends: When a company distributes dividends to its common stockholders, it reduces the retained earnings, affecting the common stockholders' equity section.

3. Stock Splits: A company might decide to split its common stock, increasing the number of outstanding shares. Although the overall value of the common stockholders' equity section remains the same, the per-share value changes.

4. Stock Repurchases: While the preferred stock typically remains constant, companies may repurchase their own common stock, reducing the number of outstanding shares. This affects the common stockholders' equity section as it reduces the amount of equity held by common shareholders.

To summarize, preferred stockholders' equity section remains stable unless there are share transactions, whereas the common stockholders' equity section can be influenced by multiple factors like retained earnings, dividends, stock splits, and stock repurchases.