MANAGEMENT

Detailed explanation-1: -Trading on equity means the use of fixed cost sources of finance such as preference shares, debentures and long-term loans in the capital structure, to increase the return on equity shares. This is also known as financial leverage.

Detailed explanation-2: -Types of Trading on Equity read more, bonds, etc.) is higher than equity in the overall capital structure. Trading on thin equity is also known as small or low equity trading. Trading on Thick Equity: If the equity capital of a company is more than the debt capital, then it is known as trading on thick equity.

Detailed explanation-3: -Trading on Equity Example: 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.

Detailed explanation-4: -One critical disadvantage of trading on equity is the uncertainty of whether a business will be able to service debt. If the borrowed amount and overall cost of capital are not down to the level of reasonable risk a company can digest, then trading on equity can prove disadvantageous.

Detailed explanation-5: -It can be classified into two types – trading on thick equity and thin equity. A company can increase its earning potential with the help of borrowed money. They have to consider that it generates adequate additional profits to cover the cost of debt capital.