Definition |
Funds raised by issuing ownership shares in the company. |
Funds borrowed by the company to be repaid with interest. |
Ownership |
Represents ownership in the company. |
No ownership; represents a loan to the company. |
Return Type |
Dividends and capital appreciation. |
Fixed interest or coupon payments. |
Risk Level |
Higher risk due to market volatility and business performance. |
Lower risk if interest is paid regularly and principal is repaid. |
Return Potential |
High potential returns over the long term. |
Limited and fixed returns. |
Voting Rights |
Equity shareholders usually have voting rights. |
Debt holders have no voting rights. |
Priority in Liquidation |
Paid after all debts and liabilities are cleared. |
Higher priority over equity in case of liquidation. |
Obligation |
No fixed obligation to pay dividends. |
Company is legally obligated to repay debt and interest. |
Cost to Company |
Dividends are not tax-deductible; higher cost. |
Interest is tax-deductible, reducing cost to company. |
Tenure |
No maturity; permanent capital unless bought back. |
Has a fixed maturity period for repayment. |
Source |
Issued through IPOs, FPOs, or private equity. |
Raised through loans, debentures, or bonds. |
Impact on Control |
Dilutes existing ownership and control. |
No impact on ownership or control. |
Financial Statements |
Shown in shareholders’ equity section of balance sheet. |
Shown as liabilities in the balance sheet. |
Tax Treatment |
Dividends taxed in the hands of investors. |
Interest may be tax-deductible for the issuer. |
Market Volatility |
More sensitive to market movements and company performance. |
Less affected by stock market fluctuations. |
Investor Profile |
Preferred by investors seeking growth and willing to take risk. |
Preferred by conservative investors looking for stable income. |
Flexibility |
Flexible for company; no mandatory payouts. |
Less flexible due to fixed repayment terms. |
Dividend / Interest |
Dividends may or may not be declared. |
Interest must be paid as per agreement. |
Wealth Creation |
Major vehicle for long-term wealth creation. |
Better for preserving capital with steady returns. |
Examples |
Shares of Infosys, Reliance, HDFC Bank. |
Bonds, debentures, fixed deposits. |
Trading |
Traded on stock exchanges. |
Traded on bond markets or OTC platforms. |
Effect on Credit Rating |
No direct impact on credit rating. |
Excessive debt may negatively affect credit rating. |
equity vs debt