What is Trading on Equity?

Published on December 22, 2025 | 3 min read

Trading on equity is a fundamental concept in the world of finance. It refers to the use of borrowed funds to increase the potential returns for the equity shareholders. It aims to invest the borrowed funds in assets or projects that might generate more revenue and surpass the interest cost of borrowed funds.

What is Trading on Equity?

Trading on equity is a financial leverage strategy, where a company uses borrowed funds to finance business projects. It aims to generate higher returns for shareholders by increasing the earnings per share (EPS).

From time to time, a company needs money for business expansion; instead of diluting equity, it might decide to go with borrowed funds.

They can borrow funds from various routes, such as issuing bonds, debentures, taking a bank loan or issuing preferred stocks. With a debt route company commits to pay a fixed rate of interest, which is the cost of borrowing.

Now, the borrowed funds can be used to buy assets of the company. These assets help the company to earn more revenue, which must surpass the interest to be paid on borrowed funds.

Trading on equity example: ABC company has borrowed ₹100 crores from the debt route at a 10% pa. interest rate. Later, the ABC company used the borrowed money to buy a factory, which generated 20% revenue.

Therefore, we can say the company is successful in trading on equity, because it has to pay ₹10 crore as interest cost, and the remaining money is to be used for further business expansion.

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Types of Trading on Equity

There are two main types of trading on equity that highlight the balance between debt and equity in a company’s capital structure:

Trading on Thin Equity

It occurs when a company’s debt capital is nearly equal to, or higher than, its equity capital. It means the business relies on borrowed funds, increasing its leverage and potential financial risk. Here, debt capital is loans, and equity capital is shareholders' money.

Example: The firm's equity is of ₹300 crores and a debt of ₹700 crores. It is considered to be trading on thin equity because debt capital is more than equity capital.

Trading on Thick Equity

It occurs when equity capital exceeds the debt capital. It means business relies on internal equity rather than loans. Here, debt capital is loans, and equity capital is shareholders' money.

Example: The firm's equity is of ₹700 crores and a debt of ₹300 crores. It is considered to be trading on thick equity because equity capital exceeds debt capital.

Purpose of Trading on Equity

The primary purpose of trading on equity is to enhance the shareholders' returns by using the debt capital. The other purposes are:

Avoid Ownership Dilution

By issuing more shares, the company’s ownership is diluted. To avoid dilution company uses debt capital to finance new projects instead of diluting the equity share capital.

Tax Advantages

Interest paid on debts can be adjusted for tax because interest is shown under the business income.

Lower Cost of Capital

The cost of capital is low when a company prefers the debt capital route to invest in assets. If the company raise capital through the equity route, then profits have to be shared in the same proportion to shareholders, which might be more costly compared to paying interest on borrowings.

Efficient Use of Leverage

When leverage is efficiently used, it signals that profitability is increasing and the company is financially disciplined, which boosts the investor's confidence.

Difference Between Trading on Equity and Equity Trading

Individuals often get confused between two terms, trading on equity and equity trading. These two terms are totally different concepts.

As mentioned above, trading on equity is a financial strategy used by companies to increase the shareholders' value by enhancing EPS. Whereas, in equity trading, investors invest in the shares to capitalise on the changes in the stock price.

Advantages of Trading on Equity

The two main advantages of trading on equity are:

1. Tax: When debt capital is preferred for financing corporate projects, the company enjoys the tax advantage. Interest paid on the borrowed money is considered an expenditure, which reduces the overall tax liability.

2. Reduces Overall Cost of Capital: Debt financing is cheaper than equity financing. By infusing cost-effective debt into the capital structure, the company can decrease its Weighted Average Cost of Capital.

Disadvantages of Trading on Equity

The main disadvantages of trading on equity are:

1. Fixed Interest Rate on Debt: It is uncertain whether the company can generate decent revenue from new projects. Because, irrespective of the returns company has to pay fixed interest rates on the borrowed funds.

2. Interest Rates Fluctuation: In case the interest rates of borrowed funds are linked with market interest rates, any rise in rates can increase the burden.

Trading on equity is a strategy used by companies to improve the capital structure and enhance shareholder value by increasing EPS. However, it is important to keep a check on the revenue generated from the borrowed funds. The revenue from new projects should cover the interest cost of the debt for the efficient working of the company.

About Author

Subhasish Mandal

Sub-Editor

finance professional with strong expertise in stock market and personal finance writing, he excels at breaking down complex financial concepts into simple, actionable insights. Holding a Master’s degree in Commerce, he combines academic depth with practical knowledge of technical analysis and derivatives.

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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.