Series 65: Chapter Two

Chapter Two

Equity and Debt Securities

(18 questions out of 130)

The securities industry is fundamentally all about two sides of the same coin: raising money and investing money. On the raising money side, when a company would like to raise money it has two basic options. First, the company can sell partial ownership in the business to others. The company does this by issuing individual, 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 larger the portion of the company she owns. Raising money in this way—by selling ownership in the business to others—is called equity financing, and what is being purchased by investors—shares or stock—is called equity securities. In an accounting context, equity means what is left over after all debts have been paid, so equity financing can be seen as selling a stake in “what’s left over”: ownership in the business.

The second primary method for a company to raise money is by issuing debt securities. Debt securities are promises by the company (the issuer) to pay the purchaser or investor a specific amount of money in the future and al