What is the key difference between equity capital and debt capital?

Equity capital represents ownership in a company and entails shareholders investing their money in exchange for ownership stakes, which often come with voting rights and a claim on future profits. When investors provide equity capital, they are essentially becoming part-owners of the business, and their returns are linked to the company's performance, typically shared as dividends or through appreciation in share value.

On the other hand, debt capital involves borrowing money from external sources, such as banks or bondholders, which the company commits to repay over time, usually with interest. While debt holders may have a claim on the company's assets in case of liquidation, they do not share in ownership or management decisions.

The context of the other options highlights aspects of equity and debt capital but does not capture the fundamental difference regarding ownership. For instance, borrowing funds is associated with debt capital, and while debt may often be cheaper and entail different risks, the essence of equity capital lies in its role in ownership rather than borrowing or returns structure. This is why recognizing that equity capital trades ownership while debt capital does not is central to distinguishing these two key forms of financing.