What are Stocks or Equity?

We hear of a markets going up & down all the time.. and many times Iam asked a question ..What the hell are these stocks?

For the benefit of people who do not understand what is a stock or equity or a share , let me try to explain in very simple terms.

I have a friend Akansha. She is an excellent Art teacher and was forever talking about her desire about starting an art class.. Once while we were in cafe she said she was ready to strike out on her own but the prospect of buying or renting a place and running the overheads expense was daunting. She did not have the funds to kickstart her venture.

I had great belief in her ability and her diligence. Just at at that time I had come into some money and I looked at it as a opportunity to support a friend as well get a good business deal.

I offfered to lend some money to her at a low rate of interest. She was grateful and said she would think about it..

After a few days we met again and again she broached the topic.. It was evident that an Art Class was her dream project. I immediately retorted, what was the probem? What is blocking you from starting the Art Studio? It couldnt be finance.. I was ready to fund. She hesitated and said that was worried about the interest burden and her ability to pay back my loan..v

She said it was her first business venture and was not sure about whether it will take off and did not want to lose a friend as well as a dream..

I got where she was coming from..

Also I did not just want to gift cash away to her. So I asked her what if we became partners and I put in the money in the venture and we share profits? We would work out the details..

The idea appealed to her and she readily agreed..

I knew for a fact that she was a great artist and a teacher and would make the venture a success. I was happy to be a partner to this as I felt the possibility of me losing money was miniscule.

So now lets come to the point..

When I offered to lend money to Akansha to start her venture it was debt. My principal was protected which would come back after the date we agreed upon and she would give me interest too.

But finally I agreed to be a part owner of the business. I agreed to share a part of profits and losses of the business. So its a share or equity capital.

If her Art class fails , I lose my principal.

But if it does it very well, then I stand to make a packet.

Hence Equity/Share Capital is part ownership of a business.

Debt is lending money to a person or a business. Returns maybe lower than equity but they are certain and there is an implicit guarantee of Principal.

In its very basic form this is Equity capital as opposed to debt.

We will see why the market goes up & down some other time..

amita..