3.1. Types and Characteristics of Securities and Investments

When a company would like to raise money by issuing a security, it has two general options.

First, the company can sell partial ownership in the business to others. The company does this by issuing tiny equal portions 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 an investor purchases, the larger the portion of the company they will own. 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. What is being purchased by investors—tiny equal portions of ownership called shares or stock—is called equity securities.

The second primary method for a company to raise money is by issuing bonds. Bonds are promises by the company (the issuer) to pay the bond purchaser a specific amount of money in the future and also to pay periodic interest along the way. Conceptually, a bond is like a loan or an IOU. Because equity financing (selling ownership) is not generally available to governments, bonds are issued by many different types of governmental organizati