What is the differance between debt, share, equity and stock?

Answer 1

Hi there,

Debt, basically refers to for instance a bank loan. In the case of a company who is seeking to finance its operations, it can chose to take a loan from a bank. The main disadvantage of debt is the legal obligation tha the company has, whereby even if in a particular year, this company is not doing well, it must still pay out its interest obligations, of say 5%.

on the other hand, shares or stock (they are the same) are types of equity. In contrast with the debt, when a company choose to finance its operations through equity, it does so by issuing ordinary shares, or preference shares to the general public. The main advantages that these equity instruments have is that the company is in no way obliged to pay out a coupon rate (ie is the interest payments) or else dividends to its shareholders, if it feels that during a particular year, it is not doing that well. The company may also decide not to give out any dividends merely because it was to use the profits generated during a given year to investment in any projects.

One last point in this regards is GEARING - a highly geared company implies that it is financed mainly by debt rather than by equity. In this event, a highly geared company would be regarded as more risky than a company who is lowly geared. This is mainly due to the reasons explained above, where the company is legally obliged to pay out its interest payments. Consquently, when in need of additional capital, such company may indeed find some obstacles as regards obtaining finance in the capital market.

Answer 2

Debt means that you will be given a monthly payment of interest, and that is guaranteed. At the maturity date - when the term of the debt or bond, smae thing, expires, you will recieve your initial amount that you invested.

As for stocks, equity and shares, they are the same thing.
YOu may or may not recieve dividends, these are not guaranteed. The value of this security may either rise or fall, depednding on the fortunes of the company. However, you can sell at at the end, or when you want to and get your money. Wheter it more or less than you initially invested.
The returns on these are far greater than on debt, but these ar e also more risky.