capital structure of a company

The capital structure of a company refers to way a company finances its assets through a combination of liabilities and equity.  It may also refer to the relative seniority or preference of various layers of securities in a company.  In US law, the order of preference or order of seniority of different securities is as follows:

The relative order of the liabilities and equity of the company becomes obvious in a winding down, liquidation, or bankruptcy scenario.  In these scenarios any payments received will generally be paid back out (in a waterfall) to the holders of debt and equity according to their relative priority, where higher priority holders are repaid in full before lower priority holders.

For these reasons, debt is considered much lower risk than equity.  Debt holders have a much higher likelihood of getting repaid in a downside scenario than equity holders.  However, for the same reason, equity holders generally experience higher rates of return on investment than do debt holders.