So far we've talked about the cash cycle and how to make it work faster by borrowing money from a bank. But there's another way to get money. See, when you borrow money, you need to make payments on it. Which requires that you have money. But maybe you want to make money with other people's money even though you don't have much money of your own.

Sounds like a scam? Nope. See, wherever you put your money, as the risk involved increases, the amount of potential returns increase, but you also increase your likelihood that you will lose your investment.

So, let's take two guys with an idea for one of the early dotcoms. No banker is going to give them much of a loan, but they need to get big.. and get big fast. So instead, they sold a bunch of pieces of their company over time. This often times works in stages, as a company gets larger. First, it's owned entirely by the founders and maybe an "Angel" investor who kicks over some startup cash. Then it may get venture capital funding. Eventually it'll trade on the stock market.

Same as I said before. The "Angel" investor could loose every penny he gave them, but he could come out with millions for a few thousand bucks of well-placed cash. The "Venture Capital" folks will put in more cash to get the same number of millions. And then when you hit the stock market, it might go up a few dollars early on... or eventually start to pay dividends.

Now, the same principle that makes a normal loan sound like a decent idea still works here. If I loan out a hundred bucks to ten people and one of them makes it big and that hundred bucks is now worth a thousand, I break even. Given a large enough pile of money to lend out, I can play often enough to make this work.

And, same as before, you break the ownership of a company down into shares. Just like a bond, each share is a security and has fairly standardized terms.

Now, I've talked about "Angel" and "Venture Capital" investors versus trading on the stock market. There's a dividing point. Before a company trades on a stock market, there are fairly strict rules about who can put money in, because too many fraudsters have pulled too many stunts. So you can't just post to craigslist or whatnot asking for investors for your brilliant idea... that's considered an attempt at selling unregistered securities. The general assumption is that if you already have a large pile of cash, you probably are either lucky or smart and probably know that you need to investigate things before you give a large check. Whereas there's always the danger that a gullible person of merely average means would gamble their kid's college fund away. So you are either an "Accredited Investor" or you aren't. There's some exceptions here and there. For example, you can give your employees stock options and it turns out to work quite well for some industries to do that. But otherwise, all "Angel" or "Venture Capital" investors need to be fairly wealthy folks.

However, you can change the game and list yourself on a stock market. This means that you accept a lot more regulation. The rules are generally involved in making a perfectly fair market. See, if I invest a huge chunk of money in a small company, I can go in and insist that they let me check the books and make sure the warehouse has what they claim it does and things like that. But every single shareholder can't get a personal tour through the books and warehouse... there could be too many people wanting at the various records. So there's auditors who are supposed to be independent who check that the statements made in the books are truthful. And the company needs to file statements about how they are doing on a regular basis and comply with other restrictions to ensure a fair market.

You need to understand that the stock market is not like gambling. Casinos do not create or destroy money. If I go into a casino with a hundred bucks, one hundred bucks leaves, although not necessarily in my pocket. But stock markets let me invest in things that create money. Gold mining creates money. Manufacturing turns materials that are worth a buck into finished products that are worth twenty bucks. So if everybody puts money into the stock market, everybody could potentially come out with a little more money than they started out with.

And it's very important that everybody has access to the same information for the market to be fair. The information may require payment, so the business of disseminating and gathering data is a huge industry, but if I wanted to, I need to be able to order a high end trading workstation with all the information I can get. One of the biggest infractions is insider information. If you knew for sure what Steve Jobs was going to announce at his next SteveNote, you could really take advantage of the market. Suddenly, I am guaranteed to make money and you might be guaranteed to lose money.

This is a fairly poorly understood point. Books and movies love to dramatize the character who got a really good tip and made a mint just as much as they like to dramatize the character who made a mint at the casino. Every training session on securities regulation will point out that any trading situation you might encounter must look free of insider information, not only when you did the transaction, but also in retrospect.

And, generally, as you get into a position that gives you access to non-public information, you will be required to restrict your trading or the information will be unavailable to you. So, I worked at a place where I had occasional access to non-public information and therefore I was pretty much forbidden to do any sort of active trading because I might accidentally find out what somebody was going to do before they did it.

What this means is that it's often fairly hard for founders to properly cash out of their own companies. Partially because they have to establish a schedule of selling that looks good in retrospect, but also because all of their trades are reported as public information so if it looks like they are cashing out, their stock price could take a dive.