Series 65: Chapter Two

Chapter Two

Equity and Debt Securities

(15 questions out of 130)

The securities industry is fundamentally all about two sides of the same coin: raising money and investing money.

When a company would like to raise money, it has two basic options. First, it can sell partial ownership in the business by issuing equal units of ownership called “shares” or “stock” (the terms are used interchangeably and mean the same thing). Investors buy shares and become partial owners of the company. The more shares an investor purchases, the more of the company she owns. Raising money in this way—by selling ownership in the business to others—is called equity financing, and the purchased shares or stock are called equity securities. In accounting terms, equity means what is left over after all debts have been paid. This is the portion that is owned outright, without debt. So equity financing can be seen as selling a stake in “what’s left over,” or ownership in the business.

The second option for a company that wants to raise money is to issue debt securities. A debt security is a promise by the company (the issuer) to pay the investor a specific amount of money in the future and also to pay periodic interest along the way in exchange for a fixed amount of money from the investor now. Bonds and notes are two common types of debt securities.

When a company raises money by issuing debt securities, it is called debt financing because the borrower (the company/issuer) will have to