What is the key characteristic of equity financing?

The key characteristic of equity financing is that it involves issuing stocks to shareholders, who then acquire ownership stakes in the company. This means that when a business chooses to raise capital through equity financing, it gives investors a claim on a portion of the company's assets and earnings. Unlike debt financing, where a company incurs obligations to repay borrowed funds with interest, equity financing does not require repayment and does not accrue interest. Instead, equity investors are compensated through dividends and potential appreciation of their shares as the company grows and becomes more profitable.

This method of raising funds is particularly beneficial for startups and businesses that may not have sufficient cash flow to service debt. By providing ownership stakes, equity financing can attract investors who are willing to take on a higher risk in exchange for the potential for higher returns if the business succeeds. This makes equity financing a crucial tool for many companies looking to fund growth, launch new products, or expand operations.