07 Feb 2019
When it comes to investment, there’s a lot to learn. To help you out, we’re going to talk you through the most common financial terms with a story. Happy reading!
Imagine one day you’re hunting through the attic. Wedged between a dusty trunk and a broken gramophone, you find instructions from your great, great grandmother: one of the most brilliant engineers of her time. The plans tell you how to build a flying skatebaord.
After reading the instructions, you realise the skateboard is actually pretty easy to make! However, you have one problem: you don’t have enough money to buy the parts. The money you have earned and kept rather than spending (what we call savings) is not enough.
You decide to ask your parents for help, but first, you’ll need to convince them that building the skatebaord is a good idea. So you draw how it will look, work out how much it will cost and predict how many skatebaords 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 pitch your skateboard plans to your parents. And you know what? Your pitch is so great that your parents agree to give you £50 for your skatebaord project. The money they have given you is called funding, and by giving you this 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. You know what else it means? You now have enough money to get started!
So you have your £50. Now what? You can’t just spend the money 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 a 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 you didn’t expect.
So, because you need more money, you’ll now have to find more investors. Hmmm… who else could invest?
A-ha! Your friends!
You head to school and on the way, you think 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 found (founding is when you start a company) the first flying skateboard company: SK8TEZ!”. Sounds good!
When you get to school, you pitch your ideas for SK8TEZ and tell your friends that if everyone gives just £1, you will reach your £20 target easily. This is called crowdfunding, and it means you raise money from lots of people who each contribute a small amount (rather than ask just one of your friends for a year’s worth of their pocket money!)
Congratulations, your friends all love your skateboard plans! However 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 in funding, you will give them a little piece of your company in return. This portion of your skateboard business is called a share, which makes your friends shareholders (because they hold – you guessed it – shares in your company)
But wait, there’s more…
For every flying skateboard you sell, you also promise to divide the extra money you make (which is called a dividend) between you and your friends.
Bingo! They say yes.
Now that you have all the money you need, the fun part begins. After school, you buy the parts you need from a local hardware store and race home to put the pieces together. TA-DA! It looks exactly like the picture. You run outside to test it and guess what…
Very soon, other kids in the neighbourhood see you flying by on your SK8TEZ skateboard. And guess what: they all want one! Just like that, you exchange your SK8TEZ for £200: your first sale! You decide to keep making skateboards and selling them to your neighbours (and soon kids around the country!), making a little money for yourself along the way.
But wait, not so fast. That £200 is not just for you. First you have to put some of the money aside for any future costs (such as parts for the next skateboard you make). You also have to pay back your shareholders (they lent you money on the condition they’d get some in return, remember?). HOWEVER… the money you have left over once you’ve paid everyone back is a profit, and that’s yours to keep. Woohoo!
Now think about this: if you were not able to sell your flying skateboard, how would you pay back your parents and friends, or buy parts for the next skateboard? Without any sales or money you wouldn’t be able to make any more flying skateboards, and you would have to tell your shareholders that you’re unable to return the funds they lent you. This is what we call a loss.
However luckily for you, this isn’t the case. You have money from the first SK8TEZ board you sold, so you use it to keep building more. One SK8TEZ, two SK8TEZ, three SK8TEZ! Soon your garage is full of flying skateboards. Next, a tech 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.
Now it’s up to you: are you going to sell your company to Elon?