in this video we're going to talk about the basics of investment in debt and equity so what are investment and what's the difference between investment and what we often refer to as debian or equity financing so let's look in the balance sheet now you know balance sheet has assets liability and equity three sections if you're looking at the right hand side you'll notice this is basically the side where explains the financing side or where the resources of the company comes from right so resources or financing so basically there are two sources of financing the first one is called debt financing and that basically leads to liability debt financing means let's say this company is apple apple can borrow money from a bank or go to the bond market trying to sell bonds so if apple is going to borrow money or issue banks and there are other ways to get financing but that's that financing but the major way is to borrow from a company or a bank or you should bounce to anyone who's interested that is called debt financing and in this transaction basically apple will receive cash and will let's say write a note to the bank if we are issuing banks then apple will be issuing bonds instead of notes to the bond holders right so that's one way of financing one way apple can get cash now the other way is called equity financing and that of course will lead to stockholders equity on the balance sheet so this is basically through issuing common stock or other type of stock there is preferred or common stock but let's use common stock as an example so in this transaction apple will be receiving cash but issuing stock certificates to its shareholders to its shareholders right so that's what we've been talking about previously in the stockholder equity chapter so there is debt financing or equity financing however in this chapter we start to talk about investment investment so what we are talking about here is purely on the asset side but however it could be confusing because here in investment side we also have two type of investment the debt investment and equity investment but notice here what we have here investment it's under the debt and equity investments are under the investments and investment in turn are under assets so we're not talking about liability or equity so what's the difference imagine instead of apple going to the bank trying to borrow money right let's just see this one for a second that's a debt financing debt financing instead of that transaction we actually have apple serve and the role of the bank and apple is trying to supply cash to another company let's say amazon and amazon right now is trying to borrow money and they find apple has some cash so maybe amazon can sign a credit agreement or contract to get cash from apple and then amazon will write a note to apple now for apple this is not financing for amazon this is debt financing right of course this is considered that financing but for apple this is actually an investment in amazon so it's called debt investment similarly if we have two companies apple and amazon let's say apple is actually amazon is issuing stocks and apple is going to be an investor in the in this situation so actually let me just to keep consistent so apple is going to give cash in exchange for stocks of amazon now for amazon of course this is called equity financing but for apple it's an investment so this is called equity investment right so investment and financing are kind of the same two sides of the same transaction but here we we don't uh we want to be very clear what we're talking about is apple serving the role and the investor or and the bank so apple is supplying cash to amazon in the first scenario this is called and in exchange for note right or bank that's called that finance debt investment for apple and in the second scenario apple is supplying cash to amazon but receiving common stocks now of course there are other ways to get equity investment so let's say instead of amazon issuing stock directly to apple apple it's the case that another person or company purchase the stock get the common stock from amazon directly and apple is actually kind of a third party but apple is paying cash to the original investor and get a stock so apple can get stocks in the so-called secondary market right and but in this case still we call it equity fan uh equity investment just because apple is investing in amazon stocks right and similarly in the debt situation especially for the bond market there is a market for bond right so what happened what could happen is amazon is selling the bonds to another investor but who turned around and sold the bond to apple so apple is not directly dealing with amazon in either of these cases but still this one we would call it that investment simply because apple is investing in bond of amazon right so the nature of the investment depending on whether you get a debt instrument or debt security that could be a notes payable a bank or if you are getting an equity security that julie is stocks so we have to be very clear about uh what debt and equity investments are and uh this is a definition and of course for equity and that investment the treatment is entirely different entirely different right so one thing to notice about that is they will have a maturity date so what does that mean that means that will typically have a payback time when it's due when the principal is due so if apple let's say is borrowing money lending money to amazon for 1 million dollars for 3 years then after 3 years the 1 million dollar has to be paid back of course in between apple is going to get the interest payment but there is a definite time timeline that the principal the 1 million dollar has to be paid back instead if apple is purchasing amazon stocks either from amazon or from a third-party party from other investors on the stock market there's no set timeline that apple uh this stock will expire there's simply uh it's just a work uh the way stocks and the bond or notes are they work differently right so for that they have an expiration date basically and deadline the maturity date uh that usually is uh for uh four months or for a couple years and then the principle has to be paid back so for that then there is a very distinct basically uh feature that is whether apple let's say in this case apple is buying some bonds is planning to hold this uh the security the bond security to the full length of its life three years or maybe one year later apple decide before the bond expire apple is going to sell that bond to another investor on the bond market and that can be done right so whether your intention is to hold the bond for the full life of that security or your intention is to sell earlier than the treatment accounting treatment now we're going to talk about these in more detail right so don't worry about it but this is kind of a preview what's incoming so the debt investment treatment is entirely different depending on the intention now for equity since there's nothing as maturity it's always it's always how to sell the difference is when are you sold in that and there's another difference how much of the equity how much percentage of the ownership because own ownership comes with the equity stock stock has if you're buying common stock that carries ownership right so how much in percentage does apple owned of the amazon stocks if the percentage gets to be a significant uh per percent then maybe apple can actually influence amazon's decision making then that's totally different than apple is just buying let's say one one share and that's a simple investment it's just hold for uh you know maybe the stock market is going very well and apple is trying to sell this and a higher point as a pure investment so pure investment or has intention to exercise some control these will lead to different treatment in accounting