Residual claim

A right to what is left over after all other claimants have been satisfied. Ordinary shareholders hold a residual claim, which is why they are paid last in a wind-up and why nothing is guaranteed to them.

Example

Assets realise 400m against 380m of creditor claims, so the residual claim is worth 20m. Had assets realised 340m, it would have been worth nothing.

Important

The residual is the most volatile line in any set of accounts. A 15% fall in what a business is worth can take the residual to zero, because the claims ahead of it do not shrink.

Related terms

  • Common stock — An ownership share in a company that carries a residual claim on its assets and earnings - whatever is left after every creditor and preferred holder has been paid - usually together with a vote on certain corporate matters.
  • Creditor — Someone who has lent money and is owed repayment, ranked ahead of equity holders if the borrower runs into trouble.
  • Debt — Money lent that must be repaid with interest, regardless of how the borrower's business or asset performs.
  • Equity — Ownership in a company or asset - a claim on whatever is left after debts, and on any growth in value.

Lessons that explain it

  • Two shareholders can own the same percentage and receive very different amounts — Common and preferred shares can represent the same ownership percentage, but preferred shares usually come with rights - especially liquidation preferences - that decide who gets paid first when a company is sold. (10 min)
  • Every instrument answers one question differently: what happens if it goes badly — Warrants give the right to buy shares at a set price. Venture debt is a loan that ranks ahead of equity and often comes with warrants. In a poor outcome, the order of claims decides who recovers anything. (11 min)
  • What a share actually is: last in line, and why that is the point — A share of common stock is a residual claim - everything that is left after every other claimant has been paid. That single fact explains most of what equities do. (9 min)

All 578 terms in the Investing glossary