Equity :
Equity represents ownership in the company (that has issued the shares) to the extent of shares held. Shareholders participate in the management of the company by exercising the voting rights associated with the shares held. They also participate in the residual profits of the company i.e. the profits remaining after all the dues and claims against the company have been met in the form of dividends. In periods of high revenues and profits, the shareholders benefit from high dividends that may be paid to them. However, there is no assurance given to equity holders either that a dividend will be paid or the amount of dividend. A company may not pay a dividend to its shareholders even if there are distributable profits if the management decides to use the profits for expansion plans, paying off debt and other financial activities that is expected to increase the value of the shares of the company. Apart from dividends, equity investors benefit from the appreciation in the value of the shares.
Investment in equity is investment in a growth-oriented asset. The primary source of return to the investor is from the appreciation in the value of the investment. Dividends are declared by the company when there are adequate profits and provide periodic income to the shareholders.
Debt :
Debt represents the borrowings of the issuer. Debt as an asset class represents an income-oriented asset. The major source of return from a debt instrument is regular income in the form of interest. The interest is typically known at the time of issue and may be guaranteed either by an undertaking of the government or by security created on the physical assets of the issuer.
The terms of the issue will determine the conditions such as the coupon or interest payable on the debt, the tenor of the borrowing after which the borrower/issuer has to return the principal to the lenders/investors, the security against the assets of the borrower offered as collateral, if any, and other terms.
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