Final answer:
Stockholders' equity demonstrates an ownership interest in a firm and is composed of paid-in capital and retained earnings. An IPO helps a firm raise capital, but subsequent trades between investors do not. Shareholders earn returns through dividends and capital gains.
Step-by-step explanation:
Stockholders' equity is a critical part of a corporation's finances and represents the stockholders' ownership interest in a corporation's assets.
The two main parts of stockholders' equity are the paid-in capital, which comes from the investments made by shareholders when they purchase a company's shares, and the retained earnings, which is the portion of profits that a company decides to keep and reinvest in the business rather than distribute to shareholders as dividends.
When a company sells stock to the public, particularly through an initial public offering (IPO), it receives financial capital that can help the firm grow.
However, once the stock is in the public domain, if a shareholder sells their stock to another investor, the firm does not receive any additional funds from this transaction. Instead, shareholders receive a return on their investment through dividends and capital gains.