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Tuesday, August 31, 2010

what are debt/equity instruments

Any company which wants to grow, need's the capital for the same. It has two options; either take the debt or sell a portion of ownership of the company.

When the capital is financed by debt, company has to borrow from the bank or issue bonds. This is called debt financing. And those who financed the capital are debt instrument holders of the company.

Debt instruments holder gets interest for their investment and finally they get their money back(principal).

Debt instruments are much more secure than equity instruments but returns are generally lesser than its equity counterparts.

On the other hand company can sell stocks in the company. No obligation of interest payment, no money to pay back. Those who bought the equity are part owners of the company and they own assets and can claim profits of the company (on proportionate basis).
This is called equity financing.
Investors bought equity instruments expect, its worth to increase in future.


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