When it comes to investing, most of us tend to take a step back, because the technicalities of investing is often considered a dark area, the same attitude is shown when one tries to understand stock markets. In reality, it is not as overwhelming as it is made out to be. A firm understanding of the basic terms involved will help ease the process.
The moment you hear the word investment, the next step is to see whether you want to invest in debt or equity. Let us first understand what they mean:
Equity investment: investing in a company’s share. The returns are based on whether the company you have invested in has made profits or not.
Return on Equity is calculated by Net income (of the company in one fiscal year) divided by the Shareholder’s equity (value of your shares put together)
Debt Investment: investing in fixed income, bonds etc. The returns are calculated in such a way that the profit generated by the company for every rupee it holds in debt.
There are advantages attached to both types of investments, and a certain level of risk as well. It is only a question of the degree of the uncertainty involved.
Equity investments are quite dynamic in nature as compared to debt investments.
There is regular monitoring required if you have invested in the stock markets, the risks involved are higher but so are the returns. These depend on the volatile market and only an approximate predicament can be done.
Whereas, in the case of debt returns, there is a specific fixed return for a particular period above which you may gain some more returns.
If you own equity shares, it represents an ownership interest in the company. i.e. if you happen to own a significant value of shares, then you may gain the right to decide or vote on the important changes made by the company.
However, if you happen to invest in the bonds of the company, then you will not gain any avenues for ownership of the company.
Should a company default, the first people to pay off would be the bondholders, whereas the equity owners can’t expect much in terms of compensation.
If you are looking to invest in government bonds then you may not be able to invest as an individual since only large financial institutions buy government bonds. So, you could invest in an institution that invests in these bonds, for instance, purchase their mutual funds.
In the recent past, the debt market has performed better as compared to the stock markets. Especially in a developing country such as ours, the debt markets have seen a visible increase in investors mainly because of the attractive interest rate on your returns and the fact that the risk is much less.