This module is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 1 of 7 · 11 min
Equity versus debt, why companies issue shares, and equity in global markets
Equity is a residual ownership claim with no promised payments, which is why it carries more risk than debt, has historically earned more, and gives companies flexible capital to grow.
In short
- Debt is a liability with contractual interest and principal; equity is not a liability and promises nothing. Shareholders hold the residual claim on assets after all liabilities are paid.
- Equity investors seek total return (price appreciation plus dividends); bond investors holding to maturity seek interest income.
- Companies issue equity in the primary market to raise capital and gain liquidity, which also gives them a 'currency' for acquisitions and stock-option pay.
- Capital is mostly used for long-lived assets, expansion, R&D, new products or regions and acquisitions; sometimes it is raised just to stay a going concern (regulatory capital, debt covenants).
- Over more than a century, equities earned clearly higher real returns than government bonds and bills, which roughly kept pace with inflation; the higher return compensates for higher risk and volatility.
- The ratio of equity market capitalisation to GDP is a rough gauge of whether a market looks under- or overvalued relative to its own history.
Unlock this lesson free for 7 days
Create a free account to get 7 days of full access — every lesson, video, flashcard, mock and the question bank. No card needed.