Companies need money to operate and grow. This money can be used to fund day-to-day operations, to invest in new projects, or to expand into new markets.

There are two main types of financing available to companies, debt and equity. Let's start with debt as it's usually quite well understood. Many of us might even have firsthand experience of debt through things like mortgages, student loans, and so on, and it's really quite straightforward. Debt is borrowed money that must be paid back with interest within a certain timeframe.

For example, a company that took out a 10 year loan at an interest rate of 5% will have to repay this loan a decade after the money has been received, and until then to make interest rates payments of 5% every year.

Equity, on the other hand, is a slightly less well-known concept.

It's often said that equity represents ownership, but what exactly does this mean? In general, equity finance means selling a part of the company's ownership in exchange for capital. When a company issues shares, it's offering pieces of its ownership to investors.

These can be the founders, angel investors, venture capitalists, or the public through a stock exchange. The latter is known as an initial public offering, or IPO for short.

Equity is a form of permanent financing since it does not have to be repaid. Shareholders who buy stock hope that the company will grow increasing the value of the company and thus the value of their shares. This can potentially make money through dividends, which are payments made from the company's profits, or by selling their shares at a higher price than they bought them for.