A Quick Look: Stocks & Bonds. How Companies Raise Money

Companies raise money for several reasons such as expansions, new equipment, research and development etc. They can raise money by either taking a loan, or by giving away pieces of ownership of their company. Early stage companies raise money from friends and family, angel investors and venture capital firms. But later when the company wants to raise more money, they do so by issuing stocks and bonds to the general public. To do so, the company needs to go public though a process called IPO (Initial Public Offering).

Stocks: Stocks are certificates that represent a small piece of ownership in public companies. They are also referred to as equities. Now you might have heard the terms stocks and shares being used interchangeably. But there is a small difference that you should know. The term stocks usually refers to certificates of ownership of any company, usually a combination, called a portfolio. When you say shares, you are referring to a specific company. For example, if you said “I’ve bought some stocks” you could be referring to one company or even multiple companies. If you say “I’ve bought some shares”, that means you’re referring to one specific company. “I just added some Apple shares to my stock portfolio."

Bonds: Bonds are a way for companies AND GOVERNMENTS to take loans from investors. In return the company/government pays an annual interest rate and also returns the principal amount upon maturity of the bond. There are three aspects to a bond; they are face value, maturity and coupon rate. Face value represents the actual amount of the loan the investor is issuing and the company/government is collecting. Maturity is the period of the loan, such as 5 years, 10 years etc. And coupon rate is the annual interest rate that you will be paid. Note that bonds don’t have to be held to maturity all the time, they can be traded through exchanges (More about that in a later article). Bonds usually offer less returns in comparison to stocks, but they also are much less riskier which make them great for balancing portfolios.

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