Learn about Bonds vs. Stocks Video

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Learn about Bonds vs. Stocks

Learn about Bonds vs. Stocks So we now know that there are two ways that a company can raise capital they can do it by borrowing money which is dept or by selling share of itself for essentially allowing other people to become a partial owner of it and that is equity. In this directly translate into securities that you’re probably familiar with but maybe you didn’t have more exact of what they are. You know what equity securities are and unless you know what is the security, security is essentially something can be sold that has some time of a claim on something or some type of economic value. So, a security in the equity world is a stock and a security in the dept world d is a bond. Let me explain this. Let me just draw a balance sheet for the fictional company. Let’s point out to me that stocks.com actually is not a fictional company that someone is indeed selling stocks on line. So, by the way I think it’s a great idea, so let’s see, I have my assets right here, this where the assets of the company but not we’re worry about now. Asset, and let me draw the equity of the company, and this is maybe share that they sold and let’s say that they have there are ten million shares. Ten million shares, and then we have the dept, the dept of the company and the liabilities. There are other liabilities other than dept pursuit but let’s not worry about right now. This is the dept I’ll do it brown, we have the dept, the dept and maybe the assets. Let me just think of a good round number. The assets are ten million dollars and assets and let’s say our dept is six million dollars and then what’s the left for the equity, in the way you have to view this is. Okay. If I have ten million dollars and I awe people six million dollars what’s left for the owners of the company, well the owners of the company, well I have four million dollars left, four million dollars left and I’ll be split amongst the owners of the company and theirs ten million individual share, if every person who ask one of the stock certificates well own one tenth million of these four million dollars or essentially was at 40% of shares or something. So, anyway, this is— I think you’re familiar with this already. This is essentially a stock, when we say ten million shares. That’s ten million shares of stock. I can just draw ten million stock certificates and you know, I guess well whatever ticker symbol is and there could be ten million of those. Now, that is interesting, there’s a lot of ways you can raise and actually there’s a lot of ways you could raise equity, it actually doesn’t have to be with selling. Well, for the most part you are selling stock, you could’ve maybe think of some other way and well talk about other forms of equity preferred stock and all of that. But in the simples level you really always sell stock. That’s a little different, that could be just in a form of a bank loan, so, this could be a bank loan or you literally go to the bank and say “Hey, I need six million dollars.” and they say “Okay. Here you go and we’ll give it to you for this interest and you have to pay back the money above and beyond the interest over this time schedules.” Not too different. They maybe a mortgage or they might say “Okay. You pay the interest for five years and of the five years you have to pay. You also have to pay the principle amount.” So you have to pay the whole six million dollars or you’re maybe have to come of the new loaner or something like that” so that was just be a bank loan. There’s other thing that are revolving lines of credits which kind of like a company’s credit card to some degree that it doesn’t have to use it but if it does that’s kind of dept the company takes on. But kind of the, the one that people always talk about— well, I guess in the same phrase is bonds, so bonds are essentially you are borrowing from the public markets again, you’re borrowing from a bunch of people, so what you do is you have this six million, let’s say this six million dollars and it could be divided into— well, let me think— you could divide this into 6,000 bonds certificates. So, this could be 6,000 bond certificates— let’s see in six million divided by 6,000 that are a thousand, right? So it’s going to be 6,000 times $1,000 bond certificates, bond certificates, certificates. Let’s visualize what a bond certificate could look like, so that could be a bond certificate and its face value and sometimes we called the par value or the stated value. It well say, you let’s call it bond from company XYZ and its face value is a $1,000. So essentially this is an IOU from company XYZ I were to hold one of these, I had one of these sitting on my right now that tells me that company XYZ is going to pay me $1,000 at some future date and that future date is at maturity. So, it’s going to pay $1,000, $1,000 at maturity, maturity. And you say “oh well Sal that’s all good but what about the interest in between and there is two ways to think about this. Maybe they are going to pay me a $1,000 in the future but I only have to give them $500. So, if you think about it there’s atomically interest occurring in that. If I give them $500 and then five years later they pay me a $1,000 they are essentially paying interest, they are paying me more back than I give to them and well in the future videos where I actually do the math of how to figure out that type of interest and in that situation where there not kind of paying me interest as they go this would be view to the zero coupon bond and I know I’m throwing a lot f terminology but it well make sense to you in a second. So, zero coupon, essentially means they’re not paying interest until they pay off the whole loan and then they might kind of the interest well implicit in the whole value of amount and I kind of jump the gun a little bit but coupon is essentially a regular payment on the bond that the company makes in this case XYZ well make. That essentially you could almost view it as a kind of interest but if you really have to figure out the interest that you are getting on the bond you would actually have to figure out. I’ll do a whole— I’ll do preview a whole play list on bond mathematics. You would have to figure out -- its base on the coupon, what you give them and then what they are going to pay you and when they are going to do it. So it’s a little bit more complicated than just saying “oh, look at that they are giving 6% coupon” which it mean, essentially means twice a year they are going to be 3% of the value of my bond. So, just a big picture, I mean both of this things are treated -- this is the stock it’s treated on exchange and you probably familiar that if you go to yahoo financer you type in the ticker symbol and you get the price for that day. Bonds are also treated, unfortunately it’s not as easy to get a colt on a bond usually you have to Bloomberg terminal of some type you can’t get in on yahoo finance and I think that’s by design by bond traitors because they probably don’t like the transparency there. But it is just like a stock it is a security it is treated. There’s a price but there’s a very fundamental difference and what kind of the holder of the bond is doing. In a bond you essentially if I’m holding a $1,000 that means that I’ve lent some amount of money to the company and it’ll be in this part of it and as long as the company doesn’t go bankrupt they’ll pay me some interest and pay me money back. When I own a stock in the company I own a share of the equity as oppose to a share of the dept which is the case of the bond, when I own a share of the equity the company is not promising to pay back anything it just saying “Look you are a part owner of this company and anything that any of the owners get you’ll get.” So, if this company becomes worth a lot, if we start dividending out things to the share holders, then you’ll get that. If the company gets sold by someone and pays extra dollars per share for it, you’ll get that money. And if the company goes bankrupt, you’ll also go bankrupt and that actually leads to interesting question. If the company goes and let’s say let’s do the example right now. Let’s say the company goes bankrupt and I’ll do a more in dept example of this. The question is, let’s say the company goes bankrupt and the people decide that it’s not operational anymore that it just can’t do business because there’s actually two types of bankruptcy. There’s one where you say “Oh, the business is good and it just can’t pay off its depts. So we have to somehow re structure this side of it.” And then the other type of bankruptcy is liquidation where they say “You know what? This business doesn’t even make sense to operate anymore let’s just sell off all of the assets.” So the question I leave you with in this video is, what happens in the situation where you enter bankruptcy people tend want to liquidate the assets? And let’s say when you liquidate the assets, there’s only eight million dollars of assets. So the question is who do you think is going to eat that two million dollars? Is it going to be the dept holders or the stock holders? Who is going to lost there money first where you can almost say who is more senior when it comes to actually getting there money back? And I’ll leave you with, maybe to the next video or our future video that I’ll do on bankruptcy. See you in the next video.

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Learn about Bonds vs. Stocks

So we now know that there are two ways that a company can raise capital they can do it by borrowing money which is dept or by selling share of itself for essentially allowing other people to become a partial owner of it and that is equity.

In this directly translate into securities that you’re probably familiar with but maybe you didn’t have more exact of what they are. You know what equity securities are and unless you know what is the security, security is essentially something can be sold that has some time of a claim on something or some type of economic value.

So, a security in the equity world is a stock and a security in the dept world d is a bond. Let me explain this. Let me just draw a balance sheet for the fictional company. Let’s point out to me that stocks.com actually is not a fictional company that someone is indeed selling stocks on line.

So, by the way I think it’s a great idea, so let’s see, I have my assets right here, this where the assets of the company but not we’re worry about now. Asset, and let me draw the equity of the company, and this is maybe share that they sold and let’s say that they have there are ten million shares. Ten million shares, and then we have the dept, the dept of the company and the liabilities.

There are other liabilities other than dept pursuit but let’s not worry about right now. This is the dept I’ll do it brown, we have the dept, the dept and maybe the assets. Let me just think of a good round number. The assets are ten million dollars and assets and let’s say our dept is six million dollars and then what’s the left for the equity, in the way you have to view this is.

Okay. If I have ten million dollars and I awe people six million dollars what’s left for the owners of the company, well the owners of the company, well I have four million dollars left, four million dollars left and I’ll be split amongst the owners of the company and theirs ten million individual share, if every person who ask one of the stock certificates well own one tenth million of these four million dollars or essentially was at 40% of shares or something.

So, anyway, this is— I think you’re familiar with this already. This is essentially a stock, when we say ten million shares. That’s ten million shares of stock. I can just draw ten million stock certificates and you know, I guess well whatever ticker symbol is and there could be ten million of those.

Now, that is interesting, there’s a lot of ways you can raise and actually there’s a lot of ways you could raise equity, it actually doesn’t have to be with selling. Well, for the most part you are selling stock, you could’ve maybe think of some other way and well talk about other forms of equity preferred stock and all of that. But in the simples level you really always sell stock. That’s a little different, that could be just in a form of a bank loan, so, this could be a bank loan or you literally go to the bank and say “Hey, I need six million dollars.” and they say “Okay. Here you go and we’ll give it to you for this interest and you have to pay back the money above and beyond the interest over this time schedules.” Not too different. They maybe a mortgage or they might say “Okay. You pay the interest for five years and of the five years you have to pay. You also have to pay the principle amount.”

So you have to pay the whole six million dollars or you’re maybe have to come of the new loaner or something like that” so that was just be a bank loan. There’s other thing that are revolving lines of credits which kind of like a company’s credit card to some degree that it doesn’t have to use it but if it does that’s kind of dept the company takes on.

But kind of the, the one that people always talk about— well, I guess in the same phrase is bonds, so bonds are essentially you are borrowing from the public markets again, you’re borrowing from a bunch of people, so what you do is you have this six million, let’s say this six million dollars and it could be divided into— well, let me think— you could divide this into 6,000 bonds certificates. So, this could be 6,000 bond certificates— let’s see in six million divided by 6,000 that are a thousand, right?

So it’s going to be 6,000 times $1,000 bond certificates, bond certificates, certificates. Let’s visualize what a bond certificate could look like, so that could be a bond certificate and its face value and sometimes we called the par value or the stated value. It well say, you let’s call it bond from company XYZ and its face value is a $1,000.

So essentially this is an IOU from company XYZ I were to hold one of these, I had one of these sitting on my right now that tells me that company XYZ is going to pay me $1,000 at some future date and that future date is at maturity. So, it’s going to pay $1,000, $1,000 at maturity, maturity. And you say “oh well Sal that’s all good but what about the interest in between and there is two ways to think about this. Maybe they are going to pay me a $1,000 in the future but I only have to give them $500.

So, if you think about it there’s atomically interest occurring in that. If I give them $500 and then five years later they pay me a $1,000 they are essentially paying interest, they are paying me more back than I give to them and well in the future videos where I actually do the math of how to figure out that type of interest and in that situation where there not kind of paying me interest as they go this would be view to the zero coupon bond and I know I’m throwing a lot f terminology but it well make sense to you in a second.

So, zero coupon, essentially means they’re not paying interest until they pay off the whole loan and then they might kind of the interest well implicit in the whole value of amount and I kind of jump the gun a little bit but coupon is essentially a regular payment on the bond that the company makes in this case XYZ well make. That essentially you could almost view it as a kind of interest but if you really have to figure out the interest that you are getting on the bond you would actually have to figure out.

I’ll do a whole— I’ll do preview a whole play list on bond mathematics. You would have to figure out -- its base on the coupon, what you give them and then what they are going to pay you and when they are going to do it. So it’s a little bit more complicated than just saying “oh, look at that they are giving 6% coupon” which it mean, essentially means twice a year they are going to be 3% of the value of my bond.

So, just a big picture, I mean both of this things are treated -- this is the stock it’s treated on exchange and you probably familiar that if you go to yahoo financer you type in the ticker symbol and you get the price for that day.

Bonds are also treated, unfortunately it’s not as easy to get a colt on a bond usually you have to Bloomberg terminal of some type you can’t get in on yahoo finance and I think that’s by design by bond traitors because they probably don’t like the transparency there. But it is just like a stock it is a security it is treated.

There’s a price but there’s a very fundamental difference and what kind of the holder of the bond is doing. In a bond you essentially if I’m holding a $1,000 that means that I’ve lent some amount of money to the company and it’ll be in this part of it and as long as the company doesn’t go bankrupt they’ll pay me some interest and pay me money back.

When I own a stock in the company I own a share of the equity as oppose to a share of the dept which is the case of the bond, when I own a share of the equity the company is not promising to pay back anything it just saying “Look you are a part owner of this company and anything that any of the owners get you’ll get.” So, if this company becomes worth a lot, if we start dividending out things to the share holders, then you’ll get that. If the company gets sold by someone and pays extra dollars per share for it, you’ll get that money. And if the company goes bankrupt, you’ll also go bankrupt and that actually leads to interesting question.

If the company goes and let’s say let’s do the example right now. Let’s say the company goes bankrupt and I’ll do a more in dept example of this. The question is, let’s say the company goes bankrupt and the people decide that it’s not operational anymore that it just can’t do business because there’s actually two types of bankruptcy. There’s one where you say “Oh, the business is good and it just can’t pay off its depts. So we have to somehow re structure this side of it.” And then the other type of bankruptcy is liquidation where they say “You know what? This business doesn’t even make sense to operate anymore let’s just sell off all of the assets.”

So the question I leave you with in this video is, what happens in the situation where you enter bankruptcy people tend want to liquidate the assets? And let’s say when you liquidate the assets, there’s only eight million dollars of assets. So the question is who do you think is going to eat that two million dollars? Is it going to be the dept holders or the stock holders? Who is going to lost there money first where you can almost say who is more senior when it comes to actually getting there money back? And I’ll leave you with, maybe to the next video or our future video that I’ll do on bankruptcy. See you in the next video.

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