Lesson 03 of 04
A share is ownership. A bond is a loan.
Companies raise money by selling more ownership or by borrowing. Lenders get interest. Owners get what remains.
Keep these
- Issuing shares splits future profits among more owners.
- Borrowing creates a bill that is paid before owners see a profit.
- Bondholders can still lose money if the issuer defaults.
The lesson
When a company wants cash for a factory, it has two broad doors. It can sell new shares. The new owners put cash in and then share whatever profit is left. Existing owners are diluted: their fraction of the company shrinks.
Or it can borrow. Lenders do not become owners. They are promised interest and, usually, their principal back on a date. That interest is an expense. It is paid before shareholders get a claim on profit. If the company does brilliantly, lenders still get the agreed interest, not the upside. If it fails, they stand ahead of owners and can still lose money.
The picture uses round numbers so the balance sheet stays visible. Real bonds add price swings, credit ratings, and the chance you sell before maturity at a price you do not choose. The core contrast holds: equity is a residual claim, debt is a contract.