Friday, 19 July 2013

Difference between Debt & Equity Investments

The financial market is filled with varied types of products for investment.  As an investor, it is important for you to judiciously choose only those products that match your needs.  A sound knowledge of these products enables you to choose the various products better & ensures you make mature investments. Let us begin with comprehending the difference between the two broad classifications of financial products: Debt and Equity.

There are various parameters that explain the performance & returns from Debt & Equity products. The below chart explains the basic difference between the two.



Debt

  • Debt means obligation.
  • Debt holders are like Money lenders.
  • Raising Capital using Debt is a burden to the Company as they have to pay the interest monthly.
  • Coupon or Monthly Interest is earned by the investors.
  • Investment in Debt is less riskier compared to Equity.
  • Returns are periodic and almost fixed.


Equity

  • Equity means ownership.
  • Everyone who owns the Equity is part owner of that company. He/She can also influence the decision.
  • Raising Capital using Equity is that the Company who issues shares need not pay any money to the share holders.
  • Investor only earns when Company issues dividends (it happens when the Company wants to share the profit to their shareholders).
  • Investment in Equity is risky compared to Debt.
  • Returns are only when selling of share happens or dividends are issued. Returns are not fixed.


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