January 24, 2018

Sreekanth B

The Main Differences Between Debt and Equity

While both debt and equity investments can deliver good returns, they have differences with which you should be aware. Debt investments, such as bonds and mortgages, specify fixed payments, including interest, to the investor. Equity investments, such as stock, are securities that come with a 'claim' on the earnings and/or assets of the corporation. Common stock, as traded on the New York or other stock exchanges, is the most popular equity investment. Debt and equity investments come with different historical returns and risk levels.

The debt market is the market where debt instruments are traded. Debt instruments are assets that require a fixed payment to the holder, usually with interest. Examples of debt instruments include bonds (government or corporate) and mortgages.

The equity market (often referred to as the stock market) is the market for trading equity instruments. Stocks are securities that are a claim on the earnings and assets of a corporation (Mishkin 1998). An example of an equity instrument would be common stock shares, such as those traded on the New York Stock Exchange.

The difference between debt and equity capital, are represented in detail, in the following points:
  • Debt is the company’s liability which needs to be paid off after a specific period. Money raised by the company by issuing shares to the general public, which can be kept for a long period is known as Equity.
  • Debt is the borrowed fund while Equity is owned fund.
  • Debt reflects money owed by the company towards another person or entity. Conversely, Equity reflects the capital owned by the company.
  • Debt can be kept for a limited period and should be repaid back after the expiry of that term. On the other hand, Equity can be kept for a long period.
  • Debt holders are the creditors whereas equity holders are the owners of the company.
  • Debt carries low risk as compared to Equity.
  • Debt can be in the form of term loans, debentures, and bonds, but Equity can be in the form of shares and stock.
  • Return on debt is known as interest which is a charge against profit. In contrast to the return on equity is called as a dividend which is an appropriation of profit.
  • Return on debt is fixed and regular, but it is just opposite in the case of return on equity.
  • Debt can be secured or unsecured, whereas equity is always unsecured.

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