Let's talk about what it means to own shares or shares in a company, units or shares. I think we all have a common understanding on this, but what i want to do in the nodding video is to make it even clearer really find out what you are buying when you acquire a share or share. The common understanding, and in fact it is just like that, is that when you buy shares or units, in essence you are part of the owners of the company.
Here's the Video Transcript:
Some of the owners of the company. Let's just compare this to bonds, as they are often used together in phrases like "Oh, I'm going to buy some stocks and bonds," or "I deal in stocks and bonds." Bonds. Bonds … you become part of the company's creditors. Part of the company's creditors. For example, you buy bonds at par, which, let's say it's $ 10. Let's say it's $ 1,000, and 1,000 people buy these bonds. Each of you lends the company $ 1,000 and since you are 1000 you lend the company $ 1 million. I won't go into more details, since the focus of the present will be stocks, but it’s good to keep in mind that it is different things. This is where you own the company. This is where you lend to the company. To make it a little clearer what do we owe, let's draw a simple balance of Company X.
This Company … Let me use a new color. Let's say we're looking at Company X, and let's assume that if we look at Company X's assets, and when we talk about assets, we make the same sense, when we talk about real estate assets life or everyday life. Things that have value. The things that will bring us any benefit in the future. The house is an asset because it will bring us benefit in the form of being able to live in it and be protected from cold weather and rain. Cars are an asset because they give us an opportunity to move. Cash is an asset because it can be exchanged for items we will need in the future. All this. Anyone else's loan is an asset, because in the future they will pay it back to us.
For me, a loan is an obligation, which we will talk about in a second, but for now let's imagine that these are the assets of Company X. Let's say they are worth $ 100 million. $ 100 million … I will not go into detail how exactly that number is determined, or whoever defined it, or who says it's 100 million, but let's accept that this is the value of her land, of its patents and copyrights, its cash and its buildings, and everything else he owns. Anything that will create value in the future.
Let's say Company X borrowed money, and maybe she took out a loan by issuing bonds, for which we will not go into detail. Let's say she borrowed money, and the total amount he owes is $ 80 million. $ 80 million. This can be a debt from a bank, or it may be a bond issue. She may have betrayed, may have issued a million bonds, with each one representing $ 80 debt. I will not emphasize this too much, but I think you understand what I mean with respect to some of the creditors, but it is a debt. $ 80 million in debt here. Let's assume that these are all obligations. There may be other obligations besides debt, but to simplify things, let us assume that this is the only obligation and usually debt has the largest share. Now, what's left for the owners? A good approach in this case is to think what happens if the company is sold and the debt was paid off. So if the company is sold and the assets are really sold for $ 100 million, you get $ 100 million.
You have to pay the creditors, you have to pay off the debt first, so you will have 100 minus 80, and you will have $ 20 million for the owners. I will mark this in green. That will leave you $ 20 million. $ 20 million left, and this is called equity, the owners' capital. Owners' equity. This is absolutely analogous the net worth of a house. If I have a $ 300,000 house, and I have to pay another $ 200,000 on my mortgage, then the net worth of my house is $ 100,000.
It is exactly the same. You can see that the assets … Let me write this down. You get a little here introduction to accounting assets will always be equal to liabilities plus equity. Just as it is, in substance or as follows: If you subtract the amount of liabilities from both sides assets minus liabilities equals equity. .