The Differences Between Equity and Debt Securities

When looking into financial security, it is very easy to become overwhelmed by the sheer amount of information out there. There are many kinds of security options available, and most can be divided into two categories: Equity Securities and Debt Securities.

What is a Security?
A security, is an asset that holds monetary value and can be equally traded among other assets of the same kind. Two commonly known types of security are stocks in a company, and bonds, generally issued by a government office. It should be understood bonds and stocks are two completely different types of securities. Stocks are known as Equity Securities, while bonds are examples of Debt Securities.

Equity Securities Simplified
Equity securities are investments where an asset is purchased, granting partial ownership in that particular venture. It has the potential for exponential growth and high risk of loss. As mentioned, purchasing stocks in a company is a well-known example of equity security. Real estate is another example: an asset purchased, with the potential to become worth much more than initially purchased, or lose much of its value depending on the housing market. Stocks hold a similar risk: the company invested in could climb to the top of the charts, or potentially it will fail and go completely under, resulting in a loss for the investor.

Debt Securities Explained
Debt securities differ greatly from equity securities, mainly because the investor is giving the bond issuer a loan, rather than purchasing something. Also known as debt instruments, these are generally issued by municipalities or state and federal government offices. Debt securities can be either short or long-term, and generally, carry with them a very low risk of loss. They tend to not have a high investment return either. A debt security is a set loan, the bond issuer agrees to pay back to the investor, over a designated period of time, with a set amount of interest over that time.

Which Choice is Best?
Many people wonder which type of security is the better choice, and this is a very difficult question. Choosing between an equity or debt security is a personal choice, and there are many factors to consider. The first concern is how much risk is personally acceptable, the second being what type of return is desired. Someone not willing to accept much risk, but less return on their initial investment, may choose a debt security over equity. Someone wanting a chance for a quick, high return may opt for an equity security, regardless of the risks.

Overall, it is always the best idea to research the investment option you are taking, be it equity or debt, and to be aware of all pathways and options involving your choice. Looking into things like the secondary market for your assets, historical growth and decline, and similar opportunities, as well as talking to experienced professionals, can help make your investment as risk-free, and profitable as possible.