Equity and Debt: Can you share your bonds?

Allar and Matt examine the two main ways companies raise money: equity and debt. You'll hear an awful lot about a fictional hairdresser and discover that Allar is really keen on free stuff. But, look, don't worry, the main thing is to learn about equity and debt. So here you go:

Equity is often described as “shares,” because you own a share of a company. Potentially you risk all you paid for it, but you also have “unlimited upside”—the better the company performs, the more you can get in return.

Debt is a fixed obligation—often it’s called a “bond”—that pays a set interest rate and returns your initial investment at the end of a specific period of time. No matter how well the company performs, you won’t get more money back. Unless the company goes bankrupt, you also won’t get less money back.

The episode includes:

• How to figure out the value of a share based on the value of the company.
• Shares don’t exist anymore as pieces of paper. They are dematerialized.
• Companies sell shares to get money to invest in making the company bigger or more profitable.
• All sorts of institutions and people invest in shares. Banks, pension funds—and individuals.
• If a company has a “credible cash flow,” a bank may be willing to take the risk of loaning money. Then the company takes on debt.
• How start-up companies can use equity and debt, and we learn how credit ratings work. ...Then there's the bit where we learn that Allar is a cheap date.

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