Let's imagine that you decide to start up your own ice cream shop business. You will need to invest in equipment, food supplies and property. All the money that you invest to start your business is called capital. Essentially, the capital of a business consists of all of its assets (or items to assist in the creation of wealth).

Equity vs. Debt

To start a new business (or fund a new project) a company can raise money in two ways - by selling shares of equity or by incurring debt. If the owner of our ice cream parlor invested all their own savings to buy the materials necessary to start the business, they made an equity investment in the company. Equity is simply ownership of a corporation. Typically, ownership units in a corporation are referred to as stock.

However, if our owner did not have necessary funds to start their own business they could finance their operation in one of two ways:

* Issue stock (or certificates of partial ownership in his company) to people who may be
interested in helping their venture out in return for a proportional share of the profits that
the company might generate.
* Borrow money that will need to be paid back with interest.