Equity and debt have different characteristics and suit different situations. Let's look at them from the point of view of potential investors.

We start with a young executive. He or she has got some money available. They're looking to invest it. They have a long investment horizon. This person won't be retiring for 30 or 40 years, is looking to put it away. This means they can afford to take high risks and thus, hopefully get high returns. They have less need for income in the intervening 30 or 40 years. Because of their situation and their ability to take high risks, and their ability to take no income in between, this person can mostly invest in equity.

Now, let's shift along the time horizon a little bit. Let's go towards someone who is at the end of their investment horizon, maybe a grandparent. They now have a short investment horizon. They're going to need access to that cash soon. They want low risk because they can't afford to make up for any losses over the long term because they need the money now. And they need a regular secure income. Because of these characteristics, the low risk and the need for a regular secure income, they will mostly be investing in debt. Debt pays interest, which will provide you with that secure income.

Now let's look at equity and debt from the other perspective, from the companies issuing the equity and debt to those investors we just saw We start with a startup company or a company going through an extremely high growth period. This kind of company represents high risk to investors. They could do very, very well and they could provide lots of returns. Alternatively, they could fail.

Because they're startups, their cash flow is negative, so they cannot make those secure regular payments out to debt holders. Thus they can't support debt. These companies will be mostly equity financed. Again, let's go along the time horizon a little bit. Our startup's been trading for many years now and it is now a mature business. It's now low risk because it's cash flow positive. The cash flows are very secure. The products are very stable. It can now support debt and because it's profitable, it can take advantage of the tax deductibility of interest. If you're loss making, unfortunately, not really much point. So this company can now be mostly debt financed.