Trading on Equity

What is trading on equity?

Stock trading refers to the corporate transaction in which a company accumulates more debt to increase the return on investment for shareholders. This leverage process is considered successful if the business can generate a higher ROI. On the other hand, if the company is unable to generate a rate of return greater than the cost of the debt, shareholders end up winning. much lower returns.

Types of stock trading

Depending on the size of debt financing relative to available equity, it is classified into two types –

Trading on thin equity

If a company’s equity is less than its debt-equity, this then involves trading of restricted shares. In other words, the share of debt (such as bank loans, bonds, bonds, etc.) is greater than that of equity in the overall capital structure. Fine stock trading is also known as low or low-capital trading.

Trading on thick equity

If a company’s equity is greater than the debt capital, then we speak of trading on thick equity.In other words, the equity ratio is higher than the debt ratio in the overall capital structure.Trading thick stocks are also known as trading high stock


From the examples presented in the previous section, we can see that stock trading is like a leverage effect that amplifies the impact of changes in earnings. The impact of fluctuating earnings is magnified on the rate of return earned by shareholders, and the variation in the rate of return is larger in thin equity trading than in strong trading. equity.


  • A business can earn more income by buying new businesses using borrowed money.
  • As the interest paid on the debt is tax deductible, it reduces the borrower’s tax burden.


  • Unstable income or volatile earnings can negatively affect shareholder returns.
  • This sometimes results in over-capitalization of the lending

Leave a Reply

Your email address will not be published. Required fields are marked *