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Video transcript

so we now know that there are two ways that a company can raise capital it can do it by borrowing money which is debt or by selling shares of itself or essentially allowing other people to become partial owners of it and that is equity and these directly translate into securities that you're probably familiar with but maybe you didn't have a more exact idea of what they are you know what equity securities are and just you know what what does the security and security is essentially something that can be bought and sold that has some type of claim on something or some type of economic value so a security in the equity world is a stock and a security and the debt world is a bond let me explain this let me just draw the balance sheet for a for the fictional company it was pointed out to me that Sox calm actually is not a fictional company that someone is indeed selling socks online so which by the way think is a great idea so let's see let's see I have a my my assets right here these are the assets of the company but that's not what we're worried about right now assets and let me draw the equity of the company and this is maybe shares that they sold and let's say that they have I don't know that there are 10 million shares 10 million shares and then we have the debt the debt of the company or the liabilities there are other liabilities other than debt per se but that's all we'll worry about right now this is the debt I'll do it brown we have the debt the dad and maybe the assets let me just think of a good round number the assets are ten million dollars in assets and let's say our debt is I don't know six million dollars and then what's left over for the equity right in the way you have to view is okay if I have ten million dollars and I owe people six million dollars what's left for the owners of the company well the owners of the company will have four million dollars left four million dollars left and it'll be split amongst the owners of of the company and there's 10 million individual shares so if if every every person who has one of those stock certificates will own one ten-millionth of this four million dollars or essentially was at 40 cents a share or something so anyway this is I think you're familiar with this already this is essentially stock right when we say 10 million shares that's 10 million shares of stock I could just draw a bunch of I could draw 10 million stock certificates and you know let's I guess we'll you know whatever the ticker symbol is there could be 10 million of those now debt is interesting there's a lot of ways you can raised and actually there's a lot of ways you could raise equity it actually doesn't have to be with selling well for the most part you are selling stock you could maybe think of some other way and we'll talk about other forms of equity preferred stock and all of that but in the simplest level you're really always selling stock that's a little different that could be just in the form of a bank loan so you know this could be a bank loan where you literally go to the bank and say hey I need 6 million dollars and they say ok here you go and we'll give it to you for this interest and you have to pay back the money above and beyond the interest over this time schedule so did you know not too different than maybe a mortgage or they might say ok you pay the interest for five years at the end of the five years you have to pay you also have to pay the principal amount so you have to pay the whole six million dollar so you maybe have to come up with a new loan or something like that so that would just be a bank loan there's other things that are revolving lines of credit which is kind of like a a company's like I guess a company's credit card to some degree that it doesn't have to use it but if it does that's kind of debt the company takes on but kind of the the one that people always talk about when I guess in the same phrase is bonds so bonds are essentially you you are borrowing from the public markets again you're borrowing from a bunch of people so what you do is you have these six million let's say the six million dollars and it could be divided into what we love me think of a good now you could divide this into six thousand bond certificates right so this could be this could be six thousand bond certificates at sea in six million divided six thousand right that's a thousand right so it could be six thousand times $1,000 bond certificates bond certificates certificates and let's load let's visualize what a bond certificate could look like so that could be a bond certificate and its face value and sometimes they'll call it the power value or the stated value it'll say you know let's call it bond from company XYZ and it is its face values $1,000 so it's essentially this is an IOU from company XYZ if I were to hold one of these ifs I had one of these sitting on my desk right now that tells me that company XYZ is going to pay me $1,000 at some future date right and that future date is at maturity so it's going to pay $1,000 $1,000 at maturity maturity and you say oh well Sal you know that's that's all good but what about the interest in between and there's two ways to think about this maybe maybe they're going to pay me a thousand dollars in the future but I only have to give them five hundred dollars right so if you think about it there's automatically interest accruing in that right if I gave them five hundred dollars and then five years later they'd pay me a thousand dollars they're essentially paying interest right they're paying me more back than I gave to them and will in future videos we'll actually do the math of how to figure out that type of interest and in that situation where they're not kind of paying me interest as they go this would kind of this would be viewed as a zero coupon bond and I know I'm throwing a lot of terminology but it'll all make sense to you in a second so zero coupon essentially means they're not paying interest until they pay off the whole loan and then they might kind of that the interest will be implicit in the whole value of the amount and I kind of jumped the gun a little bit but coupon is essentially a regular payment on the bond that the company makes in this case XYZ will make that is essentially you can almost view it as a kind of interest but if you really have to figure out the interest that you're getting on the bond you would actually have to figure out I'll do a whole I'll do a whole playlist on bond mathematics you would have to figure out you it's based on the coupon what you gave them and then what they're going to pay you and when they're going to do it so it's a little bit more complicated than just saying oh look at that they're giving a a 6% coupon which is and essentially means you know twice a year they're going to give me three percent of the value of my bond so this is a big picture I mean both of these things are traded both of you know this is a stock it's traded on an exchange and you've probably familiar that if you go to Yahoo Finance you get you type in the ticker symbol and you get the price for that day bonds are also traded unfortunately it's not as easy to get a quote on a bond you usually have to have a Bloomberg terminal of some type yet you can't get it on Yahoo Finance and I think that's by designed by bond traders because they probably don't like the transparency there but it is just like just like a stock it is a security it is traded there is a price but then there's a very fundamental difference in what kind of the holder of the bond is doing in a bond you've essentially if I have if I'm holding a $1,000 bond that means that I've lent some amount of money to the company and it'll be in this part of it and as long as the company doesn't go bankrupt they'll pay me some interest and pay me my money back when I own a stock in the company right I own a share of the equity as opposed to a share of the debt which was the case with the bond when I want to share the equity the company's not paying promising to pay back anything it's just saying look you are a part owner of this company and anything that any of the owners get you'll get so if this company becomes worth a lot if we start dividend things to the shareholders then you'll get that if the company gets sold by someone and pays X dollars per share for it you'll get that money and if the company goes bankrupt you'll also go bankrupt and that actually leads to an interesting question if the company goes bankrupt and let's say actually let's let's let's let's do the example right now let's say the company goes bankrupt right and I'll do a more a more in a more in-depth example of this the question is let's say the what company goes bankrupt and people decide that it's not operational anymore that it just can't do business because there's actually two types of bankruptcy there's one where you say oh the cup the business is good and it just it just can't pay off its debts so we have to somehow restructure this side of it and then the other type of bankruptcy is liquidation where they say you know what this business doesn't even make sense to operate anymore let's just sell off all of the assets so the question that I'll leave you with in this video is what happens a situation where you enter bankruptcy people tend to liquidate the assets and let's say when you liquidate the assets there's only 8 million dollars of assets so the question is who do you think is going to eat that 2 million dollars is it going to be the debt holders or the stock rolls who is going to lose their money first or you can almost say who is more senior when it comes to actually getting their money back and I'll leave leave you with that maybe to the next video or a future video that I'll do on bankruptcy see you in the next video
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