The world of investing can often seem confusing. Venture capital, Series B, private equity, hedging – the list of complex financial terminology is endless. But there are ways to make it more simple.
Two of the most cited terms in finance are stocks, also known as equities, and debt, usually referred to as bonds or fixed-income securities. But what are they, and what are the big differences between the two?
In really simple terms, stocks and debt are two categories of investments that are bought and sold.
The stock market is the place where company shares are bought and sold; think Apple, Lyft, Amazon and Facebook. But it includes smaller companies too. You can even buy stock in a start-up company without it having to be listed on the New York Stock Exchange (NYSE) or the Nasdaq.
In fact, investing in start-ups became easier in 2012 with the passage of the JOBS Act, which relaxed some federal securities regulations making it easier for businesses to seek investments through crowdfunding.
The net result is the emergence of platforms like Fund It!, which give investors the opportunity to inject capital into new businesses and potentially make some money.
When it comes to the debt market, this is where investment in loans are bought and sold; they are essentially an “I owe you.” Bonds are the most common form of debt investment. These are issued by corporations or by governments to raise capital for their operations and generally carry fixed interest rates.
Interestingly, there is no single physical exchange for bonds – transactions are mostly made between brokers or large institutions, or by individual investors. However, there are other important, subtle differences to note when investing in stocks or debt.
In general, stocks are considered a riskier investment. But that comes with a caveat. Stocks usually have the potential to deliver a higher return than other investments – including debt.
There are many ways you can profit from buying shares in a business. For example, some companies pay a dividend as a reward for holding shares. Dividends are the percentage of company profits returned to shareholders.
A person that holds shares may also profit from the sale of the stock if the market price increases. Both investors in public companies and private start-ups can make money this way. However, it’s important to note that equity in a start-up is less liquid than holding shares in a public company.
Investments in debt typically involve less risk than stocks. But because of this, they often offer a lower return on investment. Debt is also considered less volatile than equities. For example, even if a company goes into liquidation, bondholders are usually the first to be paid.
What type of investment is right for you very much depends on your investment goals.
If you’re someone with higher risk tolerance, buying shares in a start-up or early-stage company could be the right option. While at the other end, if you’re more risk-averse and want a safer place to put your money, buying shares in a public company or purchasing bonds could be your best bet.
Finally, investment in stocks and bonds are not a zero-sum game. Investors often prefer to have diversified portfolios – giving them the best of both worlds.
*Nothing in this article should be considered legal or investment advice. Startup investments are always inherently risky and following the advice in this article will not necessarily reduce that risk.