Debt and Equity securities - Are You Ready for them?

Almost every day we hear in the news and read in the newspapers about debt securities and equity securities. But, what are they? Can they be explained in layman terms and not for someone who has been working in investment for the last twenty years? Sure, it can be done.

A debt security is composed of a loan made by a lender to a borrower. Since the borrower has accorded to pay the money plus an interest in a specific date, then a security is created. On the other hand, an equity security is a financial instrument which says that the investor is owner of a determined amount of the corporation, and has right over the assets and dividends of the company.

Is That The Only Difference?

No. One additional difference is that debt securities involve a fixed rate income, since the interest rate that has been accorded by the lender and borrower is unmovable during the term of the debt. Meanwhile, an equity security means that the owner of the stock may or may not receive dividends. That means that the income has a variable rate.Of course, as in all financial instruments, when higher the risk, the higher the return over investment (ROI).

Are There Public Offerings On Debt Securities?

Yes. They are usually offered as bonds. For example, a company may need capital to build a new manufacturing plant. Since they have an excellent financial background, they prefer to finance themselves than using a bank. So, they make a public offering of bonds with a determined period and a determined rate. As it can be seen, it's different from stock since it doesn't give to the investor a share in the assets and dividends of the company, nor voting rights at the shareholders meetings.

What Are The Benefits Of Debt Securities?

The main benefit of a debt investment is that it can be used as leverage for higher risk investments in your portfolio. Since debt securities are backed up by big corporations, they assure a determined level of income for a determined period of time. This QROPS can be very useful for planning the future cash flow of any investor.

If you do not know how secure a determined debt security is, then you can check the information provided by the experts. Standard & Poor's and Moody's Investors Service publish a rank of debt securities in which they determine the ability of a company to pay its debts.

Another benefit is the wide spectrum of choices available. You can choose between medium and long term bonds that start at US$ 1000 per unit, with payments made monthly, semi annually or annually.

Continue to: Benefits of Equity Securities