Debt Securities vs. Equity Securities

Whether most of your portfolio is in equity investments or fixed-income investments, most of us are acquainted with the more standard terms describing traditional investment securities: stocks, bonds, exchange-traded funds (ETFs), mutual funds, etc. But sometimes, technical terms can leave the intermediate investor disconnected or insecure.

For instance, most investors probably know that stocks are also equities. Equity is a type of security. But not every investor may see the distinction between fixed-income security and equity. Most investors are probably familiar with the terms debt securities and fixed-income securities when it comes to bonds. But maybe you aren’t entirely acquainted with the distinctive characteristics that define and differentiate the two.

To add more confusion to the mix, the word security may also vary in legal definition from one country to the next.

Two of the most typical forms of securities are debt securities and equity securities. Debt securities are a kind of financial interest where money is borrowed and paid back to the lender over time, along with interest and other agreed-upon fees. Debt securities are financial assets that specify the terms of a loan between an issuer (the borrower) and an investor (the lender).

The terms of debt security generally include the principal amount to be returned upon maturity of the loan, interest rate payments, and the maturity date or renewal date. These securities are usually issued for a set time and must be paid by the end of the period. They are also called bonds, notes, deposits, or debentures.

One of the most typical structures of debt securities is bonds, such as corporate bonds or government bonds. Debt securities are closer to a financial contract between creditor and borrower rather than a specific property interest.

The most typical type of debt securities are bonds—e.g., corporate bonds and government bonds—and include other assets such as money market instruments, notes, and commercial paper.

When you buy a bond from an issuer, you’re lending the issuer money. You may be lending cash to receive interest payments on the money loaned in most circumstances. Some debt securities, such as exchange-traded notes, are utilized as a proxy for other tradable instruments. And upon maturity, you hope to receive the total notional amount of your money back.

The caveat is that debt securities also carry risk, including price and credit risks, pivoting on the instrument and the issuer. Changes in interest rates can create price risk. Credit risk means the possibility the borrower may not pay off the debt when due.

What Are Securities in Investing?

Securities are generally thought of as tradable financial assets. Although that’s an oversimplification, “illiquid” securities that don’t trade are not of interest to or suitable for most investors. Most securities are administered by institutions (typically corporations and governments) to raise capital. Therefore, almost all securities are seen as forms of investment.

Because investment securities shield a broad range of assets, they’re split into broad categories:

• Equity securities (e.g., common stocks)
• Fixed-income investments, including debt securities like bonds, notes, and money market instruments (some fixed-income investments, such as certificates of deposit, may not be securities at all)

What Are Equity Securities?

Equity securities are financial assets that designate shares of a corporation. The most prevailing kind of equity security is the common stock. And the element that most characterizes equity security—distinguishing it from most other kinds of securities—is ownership.

If you own equity security, your shares convey part ownership of the issuing company. In other words, you have a share of a percentage of the issuing company’s earnings and assets. If you own 1% of the total shares, or security stocks, issued by a company, your part ownership of the controlling company is equal to 1%.

Other assets, such as mutual funds or exchange-traded funds, may be deemed equity securities if their holdings are comprised of pooled equity securities.

How Are Debt Securities Different from Equity Securities?

In distinction to debt securities, equity securities are a share of interest in the equity of an entity, such as a partnership or corporation. The most typical form of equity securities is that of company stock. Here, the owner of the equity securities holds some financial interest in the company itself.

The differences between debt securities and equity securities include:

• Payments: Debt securities holders are owed payments for reimbursement over time according to the securities agreement with the borrower. Equity security holders do not obtain any reimbursement payments over time. Instead, owners of equity securities often earn profits by buying and selling the equity securities.
• Profits and Gains: Equity securities holders may oftentimes enjoy rights to profits and gains as the company increases in value. Debt securities are only associated with the repayment of interests and principal according to the contract amount.
• Control: Holding a debt securities does not entitle the holder to exercise any authority over the borrower’s operations. In comparison, equity securities holders, particularly stockholders, may be able to exert some control with regard to particular company decisions.

Therefore, debt securities tend to resemble loan contracts between a borrower and a lender, though they can occasionally have different formalities. Equity-based securities represent more of an ownership interest in a company or organization.

Debt Securities and Equity Securities Legal Disputes

Both debt securities and equity securities are highly regulated under securities and finance laws. Legal conflicts over debt securities are often fixed through private civil litigation, and they frequently involve many principles related to contracts and breach of contract laws. Therefore, debt securities remedies often involve monetary damages for breaches, such as the recovery of missing payment amounts.

Equity securities legal conflicts are often associated with more specific conflicts and issues. This is largely due to the close interaction between the holder and a company or business. For example, matters such as insider trading or other stock infractions are often subject to investigation by agencies such as the Securities Exchange Commission (SEC). These offenses can also result in criminal consequences.

What Are Fixed-Income Investments?

Fixed-income investments include debt securities that deliver returns in periodic and “fixed” interest payments to the investor. The most common fixed-income investments are also securities—like corporate bonds and government bonds.

Not all debt investments have a fixed payment. Some have no payment but rather incorporate the interest effect into the sale cost upfront. Other models include variable-income securities such as floating rate notes and variable rate demand obligations.

Other structures of debt obligation securities include government Treasury bills (T-bills) and Treasury notes (T-notes).

Should I Hire a Lawyer for Help with Securities Legal Issues?

Both debt and equity securities can be subject to complex legal issues. You may need to hire a securities lawyer if you need any help with securities issues. Your attorney can perform tasks such as researching finance laws, negotiating securities terms and reviewing legal documents. If you face any financial disputes or conflicts, your attorney can help you file a lawsuit and represent you in court.

Take the first steps towards resolving your debt or equity securities law issues by hiring an experienced finance lawyer on LegalMatch. There is no fee to schedule a consultation, and your information will always be kept confidential.