Difference Between Equity Funds & Debt Funds
A new company requires funds to function. Funds are amounts of money a company needs to acquire assets – factory, machinery, furniture, manpower, etc. These assets are in turn required to create capacities for manufacturing products and provide services to the customers.
A company can obtain funds in two ways – issue shares, also called equity and acquire a loan, also called a debt. A share is a share of a share capital. Shares are actually ownership rights with a specified value. They are given to people who are willing to buy them and in return invest their money in the company. These people are called investors. They are also called shareholders as they own shares of a company.
A company in need of raising funds issues shares in the primary capital markets. Primary capital markets are touchpoints between the public and a company. A capital market is a place where companies meet share traders to raise funds for business operations.
The share traders take their newly bought shares to the secondary capital markets, also called stock exchanges. It is a place where investors meet investors for selling and buying shares. Funds obtained by a company through selling shares are called equity funds.
The company owner has to sacrifice his ownership through shares to obtain funds. Thus, shares are a means to transfer ownership in a company from one person to another person. People who buy shares become owners of the company. The company has to pay dividends to the shareholders.
A company can also secure loan funds. The company can approach banks and other financial institutions to obtain loan funds. The loan lenders are legally entitled for taking back their loan amount and interest over a specified period of time, say for example, five years.
The company is legally bound to pay back obtained money with interest to its lenders. While equity funds transfer ownership, debt funds don’t at all. The loan lender earns interest but a shareholder is paid a dividend.