Stock Market Basics - Debt Vs. Equity

As a stock market basics student what you need to understand is how the stock is issued and what impact does it have on the company in terms of its shareholding as well as what happens when the company takes on more debt than it is supposed and also how the stock market looks upon the debt vs equity.

As a company owner you can do two things either borrow from somebody or borrow from the public and make them part owners of the company.

When the company takes on loan from the bank or issues bonds it is known as debt financing. As a debt financing strategy you do not want have more debt o your books that means that you need to have more progits to repay that debt.
When you buy the bonds of the company you are assured that the company will pay you a certain amount of interest every year and at the at end of the specified year the original or the principal amount will be paid back to you.

On the other hand when a person takes a loan and does not return that then it is a case of bad credit personal loans.

The other case is equity financing where the company offers the stock to several investors including public and it is known as initial public offering. In this the investors buy the stock in the hope that the company will do well and they will some day part with the stock at a value more than what they bought it for. The company benefits as they do not have to repay anything as well they have absolutely nothing to pay in terms of interest payments . This is what really the stock market basics is for you in terms why people issue stocks and are willing to part ownership of the company.

They can pay the investors some part of the profit called dividends but that is not mandatory. in fact a lot of companies do not even issue dividends for most of the formative years of the company. In the cae of equity you are not assured anything and there is absolutely no guarantee that you will get your money back in case the company does not do well or even when the company goes bankrupt . In case of the liquidation of the company the first right is of the debtors and the next right is of the preference share holders and then come the shareholders.

Let me reiterate this importnat fact of stock market basics, which tell you that you make money from the stock market only if the company does well and you are willing to take risk.