Debt vs. Equity
Updated: Apr 13, 2022
Debt investments, or bonds, are low-risk low-return options to preserve your money
Equity investments, like stocks you buy through the stock market, are higher-risk, higher-return options to grow your wealth
Ideally, you have a balance of both
As you learn about investments, you'll learn that there are two types of ways to invest: debt or equity.
Debt Investments, or Fixed Income Investments: broadly refers to those types of investment security that pay investors fixed interest or dividend payments until its maturity date. Aka bonds.
Equity Investments refer to money that is invested in a company by purchasing shares of that company in the stock market.
Government bonds, corporate bonds, and bond funds are all examples of fixed income. These investments are typically stable, meaning your returns don't go up and down as much.
Investing in debt helps you preserve capital and income, making fixed income investments a really good option for people that are close to retirement and don't want to face the volatility of the stock market. The historical average return from fixed income investments is around 3-6%.
If you are investing in the stock market, you are investing in equity. Yes, you own a part of the companies you buy shares of in the stock market! These public equity shares you buy on the stock market are considered liquid, meaning they can quickly and easily be converted into cash. You just sell them back to the market, and get your cash back.
Investing in equity is considered more risky, given how much the market changes based on external forces (think the 2008 financial crisis, or recent news on the government raising interest rates). That said, investing in the stock market also is more likely to give you greater returns. The historical average return on stocks is around 8-11%. Greater risk, greater return!
There are also options to invest in debt and equity in the private market, through options like microloans, peer-to-peer lending platforms, equity crowdfunding, or angel investing. Let's save these options for another time.
How much money you invest in stocks vs. bonds determines the return on your portfolio, or how much money you make. Learn more about your investment portfolio here.