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Equity vs Debt

To start a new business (or fund a new project) a company can raise money in two ways - by selling shares of equity or by incurring debt.

If the owner of the business invested all their own savings to buy the materials necessary to start the business, they made an equity investment in the company. Equity is simply ownership of a corporation. Typically, ownership units in a corporation are referred to as stock.

However, if our owner did not have necessary funds to start their own business they could finance their operation in one of two ways:

Risk

Risk is an inherent part of investing. Generally, investors must take greater risks to achieve greater returns. Those who do not tolerate risk very well have a relatively smaller chance of making high earnings than do those with a higher tolerance for risk.

In order to understand the different types of risk, we have broken them down into these levels:

1. Personal Risks
2. Company Risks
3. Market Risks
4. National And International Risk

Personal Risks

This category of risk deals with the personal level of investing. The investor is likely to have more control over this type of risk compared to others. Timing risk is the risk of buying the right security at the wrong time. It also refers to selling the right security at the wrong time. For example, there is the chance that a few days after you sell a stock it will go up several dollars in value. Tenure risk is the risk of losing money while holding onto a security. During the period of holding, markets may go down, inflation may worsen, or a company may go bankrupt.

There is always the possibility of loss on the company-wide level, too.

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* Contributed by: -
Prof. M. Guruprasad is Senior Faculty for Economics, Finance and Research, with AICAR Business School Raigad / Mumbai. He has more than 15 years of experience in research and educating / training management students. He was research scholar with the University of Mumbai. Worked as Executive in the Marketing research industry. Also Conducted Workshops and Training programmes. He has published articles in various industry magazines, newspapers and has initiated many discussions on academics.