Capital is one of the requirements for businesses to fulfil their short and long term financial requirements. As a business, they have two options in raising capital, one is by borrowing money and two by using their available sources.
Both Debt and Equity markets consist of listed businesses, investors and an administering body to create rules for these markets.
Investors find it hard to choose between investing in equity or debt market. Itemizing the difference between the two can help you a lot on where to entrust your hard earned money.
What Are the Differences between Debt and Equity Markets?
To help you further, below are the major differences of the two:
- Meaning
Debt is where a company borrows money from a bank, investors or any other entities while Equity is where a company shares ownership to investors to raise capital.
- What’s in it for investors
Those who are investing in equity will get profit from earnings a company will gain in the future, they call such earnings as dividends. On the other hand, for investors who are putting their money on debt will get the money they invested on a specific period of time with a fixed interest rate. These investors will not have any share on profits that the company or corporation will earn in the future.
- What they provide
Equity market provides investors interest in gaining ownership in a company or corporation, whereas debt market seeks for personal gain or interest from the money they invested.
- Level of risk
It is known that equity is a lot riskier than debt. Stocks (for equity) are highly volatile as it is impacted by economical, governmental, political or social events and prices of it will swing anytime, without notice.
Those who invested in equity may experience loss of investment when the corporation’s success declines and more if they filed for bankruptcy. While bonds (for debt) are first to get paid in cases of liquidation, hence loses are minimal up to none.
- Turnover rate
Since stocks can swing up high, investments turnover can be very high too for equity, while bonds will remain constant even if the corporation where investors invested their money takes a full swing in their business success.
- Level of understanding
Equity is a lot more complex than debt. You need to understand the market and know its movement every now and then to ensure returns and investment success. Bonds are a perfect option to those who do not have time to spend learning and observing the market’s movement
- Terms
Those who are investing in equity expect returns after a long duration of time while those who are investing in debt would yield interest after a shorter term.
- Other differences/terms used
| Equity | Debt | |
| Return | Dividend | Interest |
| Status of investors | Proprietors | Lenders |
| Reflects | Ownership | Obligation |
| Types | Stocks and Shares | Debentures, Bonds, Term Loans etc. |
Final Takeaways
- Investing in equity is far riskier than debt as market trends today is far different for tomorrow or even after in a few hours
- If you have available money to invest, long term then equity is a better choice, but if you need the money you are planning to invest in the near future then investing in debt is highly recommended
- If you are a risk taker, then investing your money to equity is recommended, yet if you want fix income on your investment, debt it is
The decision on where to invest highly depends on the investor’s available money to invest, time to spare and level of understanding on how the market progresses and moves.
