Final answer:
The account called 'retained earnings' represents the sum of a company's profits, minus dividends paid to shareholders. Investors receive returns in the form of dividends and capital gains. Retained earnings can be reinvested or used for various strategic purposes, including debt repayment.
Step-by-step explanation:
The stockholders' equity account that represents the sum of every dollar a company has earned since its inception, less any payments made to shareholders in the form of dividends, is called retained earnings. Retained earnings are a portion of a company's profit that is held or retained and saved for future use. This account can be used to reinvest in the core business, to pay off debt, or to distribute to shareholders when the board sees fit.
Investors can expect to receive a return on their investment in two ways: through dividends, which are direct payments made to shareholders, and through capital gains, which occur when an investor sells their share for more than the purchase price. Capital gains represent the difference in value between the buying and selling price of the stock or any asset.
It's important to note that the issuance of stock also allows a firm to raise financial capital, such as during an initial public offering (IPO). However, subsequent trading of these shares between investors does not provide capital to the company; it offers liquidity to shareholders and changes ownership of the company's shares.