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Answer Posted / varun vohra
There are two ways for companies to raise money for
business investment - they can borrow it and/or they can
issue shares - otherwise known as stocks. In corporate-
finance-speak, stocks are called equity capital and
borrowed money is debt capital. Equity (stocks/shares)
differs fundamentally from debt in two ways.
It represents an ownership interest in a company - you're
buying a share of the company, not lending the company
money.
A bondholder (basically, a lender) is entitled to a regular
interest payment and can call for a winding up of the
company if interest isn't paid. An equity holder is not
entitled to any regular payment - (although most stocks
provide for the payment of a cash dividend this is at the
discretion of the company's management).
So, buy a stock and you're buying part-ownership of a
company. And as an owner, you take a share in the company's
future profits.
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