Every business starts as an idea which is generally a new thing and in most of the cases adds some value in some existing thing and generates cash flow in the process.
To convert the abstract concept of idea into a concrete business it requires financing.
How an idea can be financed?
One option is to get money with a promise of giving extra as per the pertinent Interest Rate.
It’s pretty straightforward and simple to understand.
Financing through Bonds/Debt
You have an idea and other person has money and he is willing to give you the money with a promise of some additional money after a fixed period of time...Simple.
Another form of financing comes through Stocks.
Financing through Stocks
Now, this one is quite interesting and one of the greatest invention after the concept of money itself.
Let’s have a look at this more closely...
A business is divided into many parts and those parts are called Stocks of the business and people can buy those parts in the initial public offering (IPO).
Over the time these stocks are traded at a place called Stock Market.
Based on the ‘perception’ about their growth in the future the price changes over time.
Some of the characteristics of Stock investment are :
No Interest Rate based return
No Security of Principal
No promised regular income
Last claim on assets of business
In short ,You are willing to give money without a promise of anything in return !
This is an astonishing thing as well as something that baffled many and make it difficult for them to fathom.
We'll explore more... Stay tuned.