What is the primary difference between external and internal equity?

External equity primarily involves raising funds by selling shares to new investors or current shareholders who are not associated with the company in any capacity. This process might include issuing new stock or offering shares to the public, which introduces new capital from individuals or institutions outside of the company's existing ownership. This is critical for businesses seeking to grow or fund new projects without incurring additional debt.

In contrast, internal equity relates to resources that are generated within the company itself, such as retained earnings. This method doesn't involve reaching out to outside investors but rather reinvesting profits back into the business. Therefore, the correct answer accurately captures the essence of external equity as it pertains to outside shareholders and the methods through which a company can acquire additional capital.

Understanding these distinctions is crucial for assessing a company's funding strategies and the implications for its capital structure.