The Key Difference Between Equity and Debt

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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.
equity vs debt
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