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What Are Stocks?
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Equity: What Are Stocks?

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Historically, financial markets originated as a means of providing businesses with the investment capital they needed to grow and prosper; and despite the growth of these markets as an arena for pure speculation, businesses' need for investment capital is still the driving force behind the world's markets.

There are two ways for companies to raise money for long-term business investment – they can borrow it and/or they can issue shares - otherwise known as stocks. In the world of corporate finance, stocks are called equity capital and borrowed money is debt capital. 

Equity (stocks/shares) differs fundamentally from debt in that it represents an ownership interest in a company – if you buy a stock you are buying a share of the company not lending the company money. And for investors this fundamental distinction has two important implications.

1. An equityholder is not entitled to any regular payment

If you lend a company money or buy its debt securities (bonds or money market instruments) you are(usually) entitled to a regular interest payment. Stocks provide no entitlement to any kind of regular payment.

2. An equityholder is not entitled to the repayment of their investment

If you lend a company money or buy its debt securities you are entitled to the repayment of that loan at some predetermined point in the future. When you buy a stock you are effectively purchasing part of the company and the company has no obligation to give you your money back.

So, how exactly do shareholders make money out of the ownership interest conferred on them by owning a stock?


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