Trading on Equity To Enhance Returns

Published on December 24, 2025 | 3 min read

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In 2010, Reliance Industries had ambitious plans to expand its petrochemical capacity. They did not raise the capital by issuing new shares, the company borrowed crores from banks and financial institutions at favourable interest rates. They also raised funds by issuing bonds and debentures to investors in the debt market. And this paid off handsomely, the returns from the expanded operations were far more than the borrowing cost. This strategic use of debt to enhance returns is what finance professionals call ‘trading on equity.’ Let's understand what trading on equity really means and how it impacts businesses and investors.

What is Trading on Equity?

Although it has the term ‘equity’ in its name, trading on equity actually uses debt to benefit equity shareholders. The term means ‘trading on the strength of your equity base, leveraging your strong ownership capital to borrow money at competitive and amplify returns.

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How it works

Equity shareholders are the fractional owners in the company. The company then borrows additional funds through bank loans, debentures, NCDs (Non-Convertible Debentures) or corporate bonds at a fixed interest rate. This borrowed money is invested in business operations. After paying interest to lenders, the remaining profit goes entirely to equity shareholders. This boosts shareholder returns without requiring them to invest more. When the business earns more than the cost of borrowing, shareholders win big.

Example to make it clear

Scenario A (without trading on equity) Shareholders invest ₹100 crore in a company and the company makes ₹20 crore profit. Here, return on equity (ROE) is 20%. Scenario B (with trading on equity) Just like scenario A, shareholders' capital is ₹100 crore (same) and the company borrows: ₹100 crore from banks/NCDs at 8% interest. Now total capital deployed in the business is ₹200 crore, company earns ₹40 crore (on ₹200 crore). Interest paid is ₹8 crores.

Net profit for shareholders = ₹40 crore- ₹8 crore = ₹32 crore ROE is 32% (on shareholders' same original ₹100 crore) By ‘trading on equity’, shareholders' returns jumped from 20% to 32%!

The Benefits of Trading on Equity

Trading on equity gives the company and its shareholders multifaceted benefits. It enhances returns, gives tax benefits and also enables a low-cost borrowing framework for the company. Let's understand the benefits.

Enhanced returns

Shareholders enjoy higher earnings per share and their ownership is not diluted since no new shares were issued.

Tax advantage

When companies pay interest on debt, it’s a business expense for them on which the company claims tax benefits.

Retained control

As the company is not issuing new shares, it’s not diluting its ownership in the company.

Cost-effective growth

Borrowing money from lenders at a fixed rate is often cheaper than raising capital by issuing new shares.

The Risks of Trading on Equity

While trading on equity sounds attractive, it does come with risks that companies must carefully consider.

Repayment obligation

Unlike dividends, which companies can be flexible in paying or even skip during tough times, interest payments on debt are mandatory.

Magnified losses

Just as the profit multiplies, so does the loss. If the business generates returns lower than the cost of debt, shareholders suffer disproportionately. The 2008 financial crisis showed how companies with excessive leveraged loans faced bankruptcy while conservatively financed competitors survived.

Financial distress

If the company cannot meet its debt obligations, it may face liquidation, leaving shareholders with nothing. Kingfisher Airlines is a lesson in disguise of how mounting debt can sink even established brands.

Reduced flexibility

With hands full of high debt levels, it diminishes a company’s ability to grab new opportunities. Also, credit ratings may suffer, making future borrowing more expensive.

Trading on equity is a double-edged sword. When all goes well, the markets, business economy it create a great value for shareholders. However, during bad times, the same leverage that magnified profits can magnify losses too. Hence, before investing, savvy investors should check a company's debt levels and understand how trading on equity may impact a company's performance.

About Author

Pradnya Surana

Sub-Editor

is an engineering and management graduate with 12 years of experience in India’s leading banks. With a natural flair for writing and a passion for all things finance, she reinvented herself as a financial writer. Her work reflects her ability to view the industry from both sides of the table, the financial service provider and the consumer. Experience in fast paced consumer facing roles adds depth, clarity and relevance to her writing.

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About Upstox

Upstox is a leading Indian financial services company that offers online trading and investment services in stocks, commodities, currencies, mutual funds, and more. Founded in 2009 and headquartered in Mumbai, Upstox is backed by prominent investors including Ratan Tata, Tiger Global, and Kalaari Capital. It operates under RKSV Securities and is registered with SEBI, NSE, BSE, and other regulatory bodies, ensuring secure and compliant trading experiences.