When it comes to talking about investment, there are a lot of tricky words to learn. To help you out, we’ve explained the most common financial terms with a fun story – for both children and adults!
A flying skateboard! Imagine one day, while looking in the attic you find instructions from your great, great engineer grandmother on how to build one?
Your only problem is that you don’t have enough money to buy the parts for the flying skateboard. The money you have earned and kept rather than spending (what we call savings) is not enough.
You decide to ask your parents for some help, but you’ll need to convince them first. So you draw how it will look, work out how much it will cost and predict how many you could sell. This is called a deck and the process of convincing your parents to help you out is called a pitch.
You march proudly into the living room and ask your parents for the funds. Funding is the act of giving money to help build a project. And you know what? Your pitch is so great that your parents agree to gift you £50. That’s enough to get you started!
By giving you the money, your parents have decided to invest in your idea. Aha! You see what investment means now? An investment is something that you spend money on, which you believe will earn you even more money later.
So you have your £50. Now what do you do? You can’t just spend it all at once. What if your skateboard breaks down and you need to pay to fix it?
To make sure you always have enough money, you need to budget. A budget is a plan that keeps track of your money; what you spend and what you receive. So you sit down and work out your budget:
Uh oh, £50 is not enough. You need £10 more to cover what you think you will spend on building your flying skateboard (costs), and an extra £10 in case there are any extra costs that you didn’t expect.
Who else could invest? Your friends!
You head to school and start thinking about how you can make your pitch even better. How about: “I am the creator of the first flying skateboard and I need your help to start (or found) the first flying skateboard company: Sk8tez!”. Sounds good!
You arrive at school and tell your friends that if everyone gives just £1, you would reach your £20 target easily. This is called crowdfunding: raising money from lots of people who each contribute a small amount.
Your friends all love your idea but they have one question: what do they get in return? Here’s where your genius idea comes in!
For every £1 that your friends give you, you will give them a little piece of your company in return – this is called a share.
And for every flying skateboard you sell, you promise to divide any extra money you make (a dividend) between you and your friends (who are now shareholders, because they hold – you guessed it correctly: shares!). Everyone gets some money!
Bingo! They say yes.
Now that you have all the money you need, the fun part begins. You put the pieces together and it looks exactly like the picture You run outside to test it and guess what:
As soon as the other kids in the neighbourhood see you fly by they all want one! And just like that, you manage to exchange your Sk8tez for £200! Your first sale!
But wait, not so fast…
The £200 is not just for you. First you have to pay back your costs and your shareholders! The extra money that is left once you have paid everyone back is a profit. And that’s yours!
But remember, not everyone is lucky to have a profit. If you were not able to sell your flying skateboard, you wouldn’t have been able to pay back your costs or your shareholders. Not having enough money would have been a loss.
However, given your success, you decide to build some more. One sk8tez, two sk8tez, three sk8tez! Soon your dad’s garage is full of flying skateboards. Next, a businessman called Elon Musk calls you. He has heard about your success with Sk8tez and wants to buy your company. If you choose to sell, this is called an exit.
Have a think about whether or not you’d sell your company to Elon and we will tell you more about it next time!