Angus MacRae and Kristin Lang explain equity and debt on A Dictionary of Finance podcast

July 05, 2017

Podcast: Equity and debt

A Dictionary of Finance podcast looks at the two main ways companies raise money

Equity is often described as “shares,” because you own a share of a company. Potentially you risk all you paid for it, but you also have “unlimited upside”—the better the company performs, the more you can get in return.

Debt is a fixed obligation—often it’s called a “bond”—that pays a set interest rate and returns your initial investment at the end of a specific period of time. No matter how well the company performs, you won’t get  more money back. Unless the company goes bankrupt, you also won’t get less money back.<

 

  

Allar and Matt work at a bank—the European Investment Bank. But they’re not banking experts. In fact, when they talk to colleagues who are bankers, they often get a bit confused by the strange technical words and phrases they hear. Sometimes they’d say to each other: If only there was a podcast that would explain these things...

Well, now there is. Because Allar and Matt made one to help you understand finance and economics, if you’re a student or a business owner or someone who wants to understand what politicians are talking about when they discuss the economy.

In episode one of A Dictionary of Finance, Allar and Matt found out about equity and debt with Kristin Lang, head of the European Investment Bank’s international banks division for central and southeastern Europe, and Angus MacRae of the EIB’s equity, new products and special transactions department.

They learned:

  • How to figure out the value of a share based on the value of the company.
  • Shares don’t exist anymore as pieces of paper. They are dematerialized.
  • Companies sell shares to get money to invest in making the company bigger or more profitable. When they make money from their clients, the company becomes more valuable and the shares go up in value.
  • All sorts of institutions and people invest in shares. Banks, pension funds—and individuals. Says Angus, “The whole of our economy is powered by people deciding it’s a good idea to invest in companies, to make them grow and do useful things.”
  • If a company has a “credible cash flow,” Kristin says a bank may be willing to take the risk of loaning money. “Then the company takes on debt,” she says. “With debt, the company has a schedule to pay interest and then to repay the principal amount of the debt.”

The podcast also includes an important explanation of how start-up companies can use equity and debt, and we learn how credit ratings work. You’ll also get to imagine Angus owning a hair salon, and Allar gets very excited about the free stuff given out at shareholder meetings. He’s a cheap date.

Subscribe to A Dictionary of Finance podcast in the iTunes podcast app or on other podcast platforms. You can suggest topics for future podcasts by tweeting to Matt or Allar. We’re @EIBMatt and @AllarTankler.

05 July 2017

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