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Debt & Equity
In the world of finance and lending, there’s a huge difference between debt and equity. Understanding the difference between the two can have a substantial impact on your investment decisions moving forward. So, what’s the distinction?
Debt is, perhaps, a more familiar form of finance that many of us have encountered in some form or another.
It’s also quite straightforward.
In debt finance, the lender will provide a single lump sum which the borrower will pay back over a period of months or years – in addition to interest which, from an investment perspective, amounts to a return on investment for the lender.
Equity finance works a little differently.
It’s still a means of acquiring capital, but equity involves selling shares – meaning that the lender or lenders will essentially own a portion of the business or undertaking.
This means that the return on investment doesn’t take the form of interest.
Instead, an equity investor will make a return through dividends – a portion of the profits. Alternatively, they might choose to sell their shares when they feel the business in question is valuable enough.
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You could lose all of your money invested in this product. This is a high-risk investment and is much riskier than a savings account.