Explain Like I'm Five: Debt & Equity

"Debt" and "equity" are strangely loaded terms for mostly boring concepts. For our purposes today, both are methods to raise money for an ostensibly productive purpose, like a business.

As with most of my ideas, someone else has already done this more succinctly than I ever could have. From the July 27th Money Stuff email by Matt Levine:

When you raise equity, you say to investors: “We’ll take your money, and we can’t promise we’ll pay it back, but we’ll all be in this together and if we do well you’ll do well too.”

When you raise debt, you say to investors: “We’ll take your money, and we’ll pay it back with interest, but otherwise leave us alone.”

Of course. 

Debt and equity are two methods to raise money for a company, and consequently, two methods to invest as well. The difference is important!

Lastly, some free association of terms that tend to go in one camp or another:

 

Equity

  • Stock

  • Shareholders

  • Dividends

  • IPO

  • Dilution

  • Market Cap

  • Buybacks

DEBT

  • Financing

  • Bonds

  • Credit

  • Interest

  • Senior

  • Secured

  • Default

 
Robinson CrawfordELI5