Written by Upstox Desk
6 min read | Updated on October 01, 2025, 15:40 IST
What is The Purpose of Trading on Equity?
Advantages And Disadvantages of Trading on Equity
Types of Trading on Equity
What is The Difference Between Trading on Equity And Equity Trading?
Takeaway
FAQs
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.
Trading on Equity Meaning—Trading on equity means using the borrowed capital to generate revenue that boosts the profits of equity shareholders, i.e., to make the profits by investing in the debt higher than the loan’s interest costs.
Financial leverage also refers to trading on equity.
Trading on equity in financial management involves a strategy where a company takes debt as bonds, debentures, loans, or preferred stocks. A company applies this strategy to increase the equity shareholder’s return on investment.
The borrowed funds such as bonds, debentures, loans, or preferred stocks are used to buy assets for the company that can help them earn more revenue than the cost of the borrowed funds.
Companies use this method of financing when they believe the assets will generate more profits than the borrowed principal and interest amount paid on the debt. This financial process increases equity shareholders’ wealth. As a result, the value of the shares rises.
Company Y has borrowed Rs.100 crores as debt funds at a 10% interest rate. Later, the company used the debt to buy an asset (factory) to generate more income.
Here, company Y pays interest amounts of around Rs.10 crores while the income generated from the asset amounts to Rs.20 crores.
We can say that the company was successful in using the trading on equity strategy by enhancing its revenue-generating capacity.
In the capital structure, a company may fund itself with debt or equity. If the company uses more debt to finance initiatives, it will have to pay fixed interest, which is less expensive than the cost of equity capital.
After paying the fixed interest on the debts, there will be profit left over for the current shareholders.
If additional shares are issued, more equity shareholders will benefit from the gain. As a result, when profits are substantial, companies use low-cost debt rather than increasing the number of shareholders to divide the earnings or raise money for a project.
Trading on equity advantages and disadvantages are as follows:
In trading on thin equity, the borrowed amount is significantly close to the company’s equity because the company’s capital is lower than the debt capital.
For example, if company X’s equity capital amounts to Rs.100 crores whereas the debt capital amounts to Rs.300 crores, company X is said to be trading on thin equity.
In trading on thick equity, a company borrows a small amount close to its equity because the company’s equity capital is higher than the debt capital.
For example, if company X’s equity capital amounts to Rs.300 crores whereas the debt capital amounts to Rs.50 crores, company X is said to be trading on thick equity.
There is a big difference between trading on equity and equity trading. Trading on equity is about using debt in the capital structure, also known as financial leverage, to raise earnings per share (EPS).
Whereas equity trading involves selling and purchasing shares for more profit. Companies use equity trading as a strategy to create value for their shareholders by using their stock as security for loans.
Since equity is so dependable, a company that already has equity and needs additional funds might borrow money on favorable terms. With the help of these funds, the company can purchase assets that generate returns higher than the debt's interest rate.
Many companies prefer to use this strategy over the trading on equity method to raise the Earnings Per Share (EPS) of their shares.
Equity trading involves borrowing funds but does not involve raising more money from existing shareholders. Using this strategy, a company can boost share value and generate returns higher than the interest cost on debt-financed investments.
Equity trading allows organizations to earn appropriate assets by employing debt financing. The income earned using assets can help pay off the interest amount on borrowed funds. Also, the interest expense is tax-deductible.
A company is safe to employ the trading on equity strategy as long as the company is confident of earning excess income over borrowed funds and does not go bankrupt in the long run.
There is a real risk if the company goes bankrupt or does not generate maximum returns.
Trading on thin equity and trading on thick equity are two different types. In trading on thin equity, the borrowed amount is close to the company’s equity because the company’s capital is lower than the debt capital.
In contrast, a company that trades on thick equity borrows a little sum that is near its equity because its equity capital is bigger than its debt capital.
When an organization encounters uneven earnings or earnings that are lower than expected, a major risk comes with trading on equity or risk that it could bring to an organization. The interest paid on borrowed money is an unavoidable expense for the organization.
The cost burden grows when assets purchased with borrowed money are not expected to generate the expected income. Another risk is that the business won’t be able to cover its cost of capital in the long run.
The company has to bear extra interest rate payments, which can affect its overall income statement.
About Author
Upstox Desk
Upstox Desk
Team of expert writers dedicated to providing insightful and comprehensive coverage on stock markets, economic trends, commodities, business developments, and personal finance. With a passion for delivering valuable information, the team strives to keep readers informed about the latest trends and developments in the financial world.
Read more from Upstox