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What is the Difference Between Debt Market and Equity Market?

IndianMoney.com Research Team | Posted On Thursday, March 05,2020, 05:46 PM

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What is the Difference Between Debt Market and Equity Market?

 

 

While both equities and debt investments deliver attractive returns, there are some basic differences that every investor must know. This article aims to give you a clear understanding of both the equity and debt market:

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What is the Difference Between Debt Market and Equity Market?

Debt Market:

The debt market is the credit market where the investors can invest in debt issues and trade in debt securities. The securities in the debt market securities contain lower investment risk compared to the equities market. The main aim of debt securities is to allow investors to earn interest income and gain capital appreciation.

The debt market mainly contains the securities issued by banks and financial institutions and the issues of corporate like the convertible and non-convertible debentures, secured premium notes and deep discount bonds. The investment tenure of these securities ranges from ultra-short-term to medium term. The bonds market issues the following types of securities:

Bonds: A bond can be issued by a government entity or a private company. Through the issuance of bonds, entities raise capital at a lower interest rate to fund developmental projects. Consequently, the buyer loans the money to the bond issuer and receives interest on a regular basis until the bond matures.  

See Also: Types Of Debt Instruments

Debentures: Debentures are issued by companies and bear a fixed rate of interest. While some debentures offer the facility of conversion into equity shares other cannot be converted.

G-secs: These are issued by the RBI on behalf of the Government. They are issued at a discounted price and are redeemed at their face value.

Equity Market:

Equity markets are synonymous with two concepts – high returns and sudden declines in share prices. Most traditional investors avoid entering the equity market as they are afraid to lose money. The equities markets are volatile and its performance is affected by economic, political and global factors.

In an equity market, you can either be an investor or trader of stocks. The companies issues shares for raising capital from the market.  You can become a shareholder in any of the companies by purchasing a share. The best way to avoid losses in the share market is by having sound knowledge of the performance of the stocks and knowing when to hold and sell a stock.

See Also: How Do I Invest in Share Market?

Thus, you can either buy and sell shares and make profits within a short-term or you can invest in company shares for a long-term and earn good returns through appreciation of the market value of the shares. The companies issuing shares in the market are listed as per their market capitalization and are thus categorised as large-cap stocks, mid-cap stocks and small-cap stocks. The income potential differs as per their market capitalizations.

Difference Between Debt Market and Equity Market:

In the table below we have analyzed the basic difference between the two markets:

Equity Market

Debt Market

Investment in equities indicates ownership interest of the buyer in the issuing company

Investment in debt securities only indicates financial interest. Here the individual does not get ownership rights.

In an equity market, the investor is eligible to receive dividend payments from the profits of certain blue-chip companies. Sometimes the investors also receive additional shares in lieu of dividends.

In the debt market, the investors loan money to the debt issuing entity. Thus the issuer must pay the investor the contractual interest rate and oblige the terms. The issuing entity passes no other benefit to the holder of the bond.

The equities market is regulated and is monitored by SEBI.

Since debt instruments can only be issued by high rated companies they are regulated by SEBI. Whereas G-secs issued by financial institutions and banks are regulated by RBI.

Investors participate in the equities market in a hope to earn more returns by riding the market volatility.

The debt market is mainly for risk-averse investors and thus they offer lower returns. However, debt market securities can also be used to diversify an investor’s risk profile.

The equities market allows companies to raise funds without incurring debt.

The entities issuing debt instruments raise money by incurring debt.

From the above analysis, it is clear that the stock market and the debt market are for two different classes of investors. Investors willing to appreciate capital through risk exposure can opt for share market investments while debt securities are suitable for investors who want to appreciate capital through less volatile investment instruments. However, you can invest in both debt and equities at the same time and diversify your portfolio and balance the overall investment risk.

See Also: 7 Things to Know About Equity Investing

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