Equity
Both debt and equity are types of finance. However, equity has some characteristics that make it very different from debt. Equity represents ownership claim to the company. Equity holders are claimants of a companyโs cash flow residuals in the form of dividends. When the holding period return is calculated, capital gains (share price increase) also increase equity holdersโ investment value. Unlike debts (including bonds), which legally must be paid before tax, companies can decide their dividend payout policies. They may pay shareholders dividends or retain the revenue to reinvest into the company. Since dividends are paid out from profits, they are taxed. The companyโs ability to generate cash flow is the only real means of gaining returns for equity holders.