SIE: Chapter One

Chapter One

Equity Securities

The securities industry is about two things: raising money and investing money. Raising money—also called financing—refers to finding sources of money. Those sources are investors of various kinds. When a company wants to raise money, it can offer investors two options. The first is to sell partial ownership in the business. A company does this by issuing equal units of ownership called “shares” or “stock” (the terms are used interchangeably and mean the same thing). Investors buy these shares and become partial owners of the company. The more shares investors buy, the more of the company they own. The more shares a company sells to investors, the more money it raises. Selling partial ownership in the form of shares or stock 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. It is the portion of the company that is owned by investors.

The second way for a company to raise money is to issue debt securities. A debt security is sort of like a loan or an IOU. In exchange for money from an investor, the company (also called the issuer) agrees to pay the investor a s