Equity vs. Debt
To start a new business (or fund a new project) a company can raise money in two ways – by
selling shares of equity or by incurring debt. If the owner of our ice cream parlor invested all their
own savings to buy the materials necessary to start the business, they made an equity
investment in the company. Equity is simply ownership of a corporation. Typically, ownership
units in a corporation are referred to as stock.
However, if our owner did not have necessary funds to start their own business they could
finance their operation in one of two ways:
1. Issue stock (or certificates of partial ownership in his company) to people who may be
interested in helping their venture out in return for a proportional share of the profits that
the company might generate.
2. Borrow money that will need to be paid back with interest.
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