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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.
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.