Question

Another critical part of rebuilding Enchancia’s economy is to attract foreign investment. To do this, the country needs functioning capital markets. Explain to Sofia the role of capital markets in the economy. Also, explain to her the difference between debt and equity.

Answer 1

Role of capital market in the economy is :

1. With help of capital market only the business community raises long term funds.

2.Provides opportunity for the public to invest their savings in attractive securities providing high returns.

3. Attracts funds from foreign countries.

4. It enables to acheive economic growth as capital formation is promoted through capital market.

5. Existing companies are able to expand their industries due to capital market.

Difference between debt and equity :

1. Debt involves borrowing money directly whereas equity means selling a stake in your company in hopes of securing financial backing.

2. Equity funds are not to be repaid whereas debt funds are needed to be repaid.

3. Cost of debt is finite and is limited whereas cost of equity is uncertain.

4. Equity is more riskier than debt whereas debt is less riskier and safe.