Debt Securities vs Equity Securities
Debt securities are financial assets that define the terms of a loan between an issuer (the borrower) and an investor (the lender).
Equity securities are financial assets that appear to be the shares of a corporation.
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What are Debt Securities?
Debt securities are a kind of financial interest where funds are borrowed and paid back to the lender over time along with interest. These sorts of securities are usually issued for a particular period of time and should be paid at the end of the time period. One of the most common forms of debt securities is bonds such as corporate bonds, zero-coupon bonds, municipal bonds, or government bonds. The nature of debt securities is closely related to the financial contracts between the creditors and borrowers.
What are Equity Securities?
Equity refers to ownership. The most general kind of equity security is common stock. If we have owned equity security. We have shares to represent part ownership of the issuing company. In other words, we have claimed a percentage of the issuing company’s earnings and assets. If we have owned 5% of the total shares or security stocks issued by a company, our part ownership of the controlling company is equivalent to 5%. Other assets such as mutual funds or exchange-traded funds we may have considered equity securities as long as their holdings are composed of pooled equity securities.
How are Debt Securities different from Equity Securities?
- Settlements: Debt securities holders are owed payments for reimbursement over time according to the securities contract with the borrowers. Equity security holders do not receive any reimbursement payments over a period of time. In fact, owners of equity securities usually acquire profits by buying and selling equity securities.
- Profit and Gain: Equity securities holders may often enjoy the right to profits and gains as the company increases in value. Debt securities are only associated with the repayment of interests and principal as per the contract amount.
- Management: Keeping debt security does not permit the holder to exercise any control over the operations of the borrower. Other equity security holders, especially stockholders, might be able to exercise some control with regards to certain company decisions.
- Time Frame – The investing time frame for a shareholder generally varies as they can easily sell at any time in the stock market. A bondholder usually holds the bond until it matures and his principal is returned with interest. A bondholder may sell early, but risks getting less than his original investment if the bond is sold before maturity.
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What are the risks associated with Debt and Equity Securities?
|Debt Securities||Equity Securities|
|Default or Credit Risk||Market Risk|
|Inflation or Purchasing Power Risk||Business Risk|
|Reinvestment Risk||Tax-ability Risk|
|Call or Buy-back Risk||Interest Rate Risk|
|Liquidity Risk||Regulatory Risk|
Author: Yash Tanwar
About the Author – Commerce graduate from the University of Delhi who is currently pursuing FRM Part-1 2020. He wants to obtain a stronger track record of result making and gain something new skill sets that are applicable to Finance specifically in risk domain.