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Definition: Equity

Debt and equity are the two common ways for companies to raise money for investments. Whereas debt takes the form of loans which have to be retuned with an interest payment on the principle; equity gives ownership rights to investors. Equity usually refers to stocks/ shares given by the companies.

The company is not obliged to pay regular payments on equity, though it may decide to issue dividends to investors to share the company’s profits. Investors buy the shares with the anticipation of future growth of the company and rising stock prices. Shares bought at a lower price and sold at a higher price will result in capital gains to the investors. Shares also give an ownership, usually 1 vote per share to the shareholders.

The risk associated with equity is more than that associated with debt, and so are the expected returns.Equity holders have the lowest priority over the claims of the company in case the company is liquidated. They will receive their share once all the other liabilities have been paid off.



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