Debt and Equity Market: Do you know about Debt and Equity Market? What is the difference between Debt and Equity Market? What is there a need for Debt and Equity? If you know then just go this post for a quick revision. If you don’t then read this post thoroughly.
How do companies Raise Capital?
For every business to run, the business requires some capital (money). To raise this capital, the business can either take loans/borrow from someone (Debt) or the business can issue shares (Equity).
What is Debt and Equity
Debt: When a company borrows money from banks or external parties with payment of interest in return to the lender, it is a debt. Examples of debt instruments are bonds (both government and corporate) and mortgages. In debt, the lender does not get ownership in the company.
Equity: Equity refers to the stock that indicates the ownership interest in the company. When a company/business issues its share, there are people and organizations that buy these shares. The money that is invested by the people and the organization goes to the business as capital and in return, the investors get some ownership in the company proportional to the number of shares bought. Also, the business in return pays the dividend to the buyers of the share. Dividends are the percentage of company profits that is returned to shareholders.
So basically Debt and Equity are two ways by which a business raises capital.
Comparison between Debt and Equity
| Comparison | Debt | Equity |
| Definition | Money raised by the company in the form of borrowed capital is known as Debt |
Equity refers to the Net Worth of the company. TheCompany issues shares. By investing in these shares/equity, an investor gets an equal portion of ownership in the company, in which he has invested his money. |
| Type | Borrowed Fund (Since it has been borrowed) |
Owned Fund (Not borrowed, as ownership has been given in return of the investment) |
| Denotes | Obligation (It shows the amount of money owed by the company towards another person or entity who has lended to the company) |
Ownership (It reflects the capital owned by the company) |
| Types | Term loan, Debentures, Bonds | Shares and Stocks |
| Return | Interest | Dividend |
| Secured? | It may be secured or unsecured | Always Unsecured |
Some Important Terms
Stock Exchange: Stock exchange is an electronic market that provides a platform to the owners of businesses to come together to buy and sell their shares of stock. Presently there are seven SEBI recognised Stock Exchange in India. These are: BSE Ltd., Calcutta Stock Exchange Ltd. , India International Exchange (India INX), Magadh Stock Exchange Ltd., Metropolitan Stock Exchange of India Ltd., National Stock Exchange of India Ltd. and NSE IFSC Ltd.
Brokers: To buy or sell a share of a company you need an intermediary who acts as a link between you and the company. A broker is an individual or firm that executes buy and sell orders of shares submitted by an investor and in return charges commission for it.
Depositories: A depository is an entity which helps an investor to buy or sell securities such as stocks and bonds in a paperless manner. In India, there are two depositories: Central Depository Services Ltd. (CDSL) and National Securities Depository Ltd (NSDL). There do not serve the investors directly. They serve through Depository Participants. A depository acts as a link between the shareholders and the listed company that issues shares. A depository eliminates the risk associated with holding physical securities.
Depository Participants: These are the agents of the Depositories and act as a link between the depository and the investors.
How Depositary Works
- Depository is an organization which holds securities with it in De-Mat form i.e electronic format.
- Depository (NSDL or CSDL) interacts with its clients/investors through its agents known as Depository Participants also known as DPs.
- For any investor, to avail the services provided by the Depository, he/she has to open Depository account which is an electronic account, known as Demat A/c. This account is opened with any of the DPs.
Demat Account: It is an electronic account that holds shares/stocks in electronic form. As you need a bank account to store your money, similarly you need a Demat account to store stocks.
Regulator of Depository and DPs
The Securities and Exchange Board of India (SEBI) is responsible for the regulation of Depository and Depository Participants ranging from registration, regulation and inspection of the depository.