Debt Investments or Equity Investments?
The differences between debt and equity investments:
Equity investments represent common stock, preferred stock, and similar ownership interests in a company. Equity investments can be classified based on the percentage of the investee voting stock; i.e. holdings of less than 20 percent, means the investor has a passive interest in the company; holdings between 20 to 50 percent, means the investor has significant influence on the company’s decision making; and holding of more than 50 percent signifies a controlling interest in the company.
Debt investments represents a creditor relationship, examples include government securities, convertible debt, and corporate bonds. There are three categories that debt securities are grouped into: held-to-maturity – a security that has positive intent and the ability to hold to maturity; trading – securities bought and held to be sold at a profit in the near term; and available-for-sale – securities not classified as held-to-maturity or trading securities.
Would a company want to choose equity or debt as an investment?
A company would be influenced to buy equity securities if it had a long-term use of the asset. Similarly, a company would opt for debt investments if they didn’t intend on holding on to the security in the not too distant future.