The Key Difference Between Equity and Debt

equity vs debt
Feature	Equity	Debt
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.