Debt vs Equity

All investments can be broadly classified as debt or equity instruments. Debt involves lending someone else money in return for some kind of interest. For example, when you save with a bank you effectively lend them money and in return, they pay you some interest. Equity means owning a stake in the asset. For example, when you start a small shop you essentially own all the equity in that business. When you buy land you own all the equity in that asset.

Now debt instruments are usually safer than equity instruments. This is because debt assets are often secured. For example, when you buy a treasury bill you have the backing of the whole government to repay this loan to you with interest. On the other hand, when you start your small business you bear all the risk of failure. 

Equity instruments however provide for growth opportunities which you would not normally get with a debt asset. For example, if you buy shares in a profitable company, the prices could go up and you may benefit from the capital gains. If your business does well you may become very rich. If the land prices go up you can reap a good profit.

In all cases, it is best to have a mix of both debt and equity instruments. On the one hand, you get safety and stability and on the other hand, you have the upside of growth.

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