Debt Lender vs. Equity Investor

by Tim Grant, Demand Media
    Debt lenders and equity investors assume different risks.

    Debt lenders and equity investors assume different risks.

    The main thing a debt lender and equity investor have in common is that they are both seeking a return on money they have invested in a business enterprise. What sets them apart is they are taking different kinds of risks. The debt lender is providing a loan to the business, which promises to repay the loan plus interest over a specified period of time. If you buy a bond, you are, in effect, a debt lender. The equity investor, on the other hand, buys an ownership stake in the company. The value of his investment capital will rise or fall according to the company's performance in the marketplace. If you own a stock or a mutual fund that owns stock, you are an equity investor.

    Risk Tolerance

    Debt lenders prefer to take less risk than equity investors. Companies wishing to raise money for capital projects make promises of repayment to debt lenders. Equity investors have no guarantees, because stock prices fluctuate far more wildly than bond prices. But an equity investor is willing to assume a higher risk for the potential to receive a bigger return on his investment.

    Profit Expectations

    Debt lenders do not usually expect to get rich from the interest payments on bonds. But equity investors very often do hope and dream that the value of the shares they own in a company will appreciate by triple digits or more. Therefore, debt lenders are more concerned about preserving their capital and growing their balances slowly over time with periodic interest payments. Equity investors take a chance on losing substantial portions of their capital in a market downturn for the chance to hit a home run with a winning company.

    Predictability

    Debt lenders invest for income. They want to receive a steady flow of predictable interest payments they can count on either to pay living expenses or to reach a savings goal. Debt lenders know their bonds will pay a certain amount each year, which makes it easier to plan for the future. Equity investors have no way of knowing what their account balances will be from one day to the next, due to company stock prices always fluctuating.

    Time Horizon

    Debt lenders are usually long-term investors. Companies and government agencies that issue bonds usually make interest payments over a period of years. People who are soon to be retired are typically better off with bonds because they would not want to risk losing money when their working days are winding down. Equity investors have the prerogative to cut their losses at any time if a company is not performing up to their expectations. Equity investors who are young can afford to risk losses in the stock market when they have many years before retirement, because they have time for their investments to recover.

    About the Author

    Tim Grant has been a journalist since 1989 and has worked for several daily newspapers, including the Charleston "Post & Courier," the "Savannah News-Press," the "Spartanburg Herald-Journal," the "St. Petersburg Times" and the "Pittsburgh Post-Gazette." He has covered a variety of subjects and beats, including crime, government, education, religion and business. He graduated from The Citadel with a Bachelor of Science in business administration.

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