In the general investment environment, there are two major categories of investments: debt market and equity market. They are located at the extreme ends of a very long curve. Debts are a company’s borrowed capital, whereas equity markets are made up of a company’s owned capital. Every characteristic, including risk, returns, fundamental structure, and motivation, is different between the two. There isn’t a single investment product that fits everyone. Let’s examine each concept in more detail to see why, despite their obvious differences, they are sometimes interconnected and equally significant.
How do equity markets work?
- Meaning of equity: Shares or stocks of companies that are listed on stock exchanges are traded in equity markets. A share of ownership in a company is represented by its stock. You share ownership of the company as shareholders. The company is owned by the shareholder who holds 50% or more of the voting stock.
- Risk and return: Debt markets are less risky than equity markets. Shares that are listed are traded every day during market hours. Their profits are not assured. You can book profits by receiving dividends or by reselling your investment at a higher markup on the market. They are very erratic, and the numbers are determined by things like
- demand and supply
- company’s financial health
- sectoral performance
- quarterly results and more.
Returns there are also correspondingly unstable. Equities can provide returns of more than 10–12% over a period of 7–10 years if held for a longer time.
- Research requirement: The amount of research necessary in the debt and equity markets varies slightly. An investor must be well-read and conduct extensive research before making a stock market investment. You must carefully examine the company’s financial statements, balance sheets, management, and overall financial situation.
Who can invest in equity markets?
Here are some quick tips to help you comprehend the qualities required to invest in stock markets:
- Higher risk profile
- More funding to cushion against volatility
- Perseverance to withstand market volatility and to stay invested
- Time to research and study the companies
- Patience for returns to rise and become stable as returns can go very high but are also volatile
How do debt markets work?
- Meaning of debt: Debt is a type of borrowed capital, whereas equity is a type of capital that is owned. By issuing bonds or government securities, the federal or state governments raise money from the market. In actuality, the government is borrowing funds from you and will periodically reimburse you with interest. At maturity, the principal is returned. Similar to this, a business can raise capital from the market by offering debt market securities like corporate bonds. Bonds issued by businesses and governments make up the debt market.
- Risk and returns: Debt is a type of borrowed capital, whereas equity is a type of capital that is owned. By issuing bonds or government securities, the federal or state governments raise money from the market. In actuality, the government is borrowing funds from you and will periodically reimburse you with interest. At maturity, the principal is returned. Similar to this, a business can raise capital from the market by offering debt market securities like corporate bonds. Bonds issued by businesses and governments make up the debt market.
- Research requirement: Bonds require less research than other types of securities. There are fewer factors that influence the interest rate you receive on the money you lend out, particularly if you don’t frequently buy and sell bonds like you would with stocks.
Additionally, the government guarantees the interest rate. In the case of corporate bonds, you still need to do some basic background research on the company, but generally speaking, bonds do not call for you to be particularly optimistic.
Who can invest in debt markets?
The following are some things to consider before deciding whether or not to invest in debt markets:
- Risk-averse investors
- Investors looking for guaranteed returns
- If you do not want to invest a lot of time researching
- If you want to park your money and leave it there and not worry much about it
How are the investors prioritised in the debt and equity market?
When brought together, investors from the two markets are given varying degrees of priority and are most definitely not competing on an even playing field. One significant distinction between the debt and equity markets is that in the event of a company’s default and forced liquidation, bondholders are given priority. Creditors are paid off first in all cases of default across industries, and in this case, it is the bondholders. Owners of the business, such as shareholders, are given last priority.
Difference between equity market and debt market
| Sr. No. | Equity Market | Debt Market | |
| 1) | Meaning | Equities are owned capital. | Debt is a form of borrowed capital. |
| 2) | Who can issue | Companies registered with Sebi | Companies, governments |
| 3) | Risk | High risk | Low-risk because government-backed however corporate bonds are risky |
| 4) | Returns | Volatile | Moderate |
| 5) | Investor status | Shareholders, part owners in the company | Creditors to the company/government |
| 6) | Nature of return | Dividends or profit booking while trading in the stock market | interest paid by the bond issuer |
| 7) | Regulator | Sebi | RBI and Sebi in case of corporate bonds |
How can you invest in the two markets?
The debt market and the equity market are similar in many ways when it comes to how you can approach these two markets. Although both of them can be approached directly or through mutual funds, there are some subtle differences that might exist.
Equity markets:
Here are two ways you can access the equity market:
- Direct investment: By purchasing the individual stocks listed on the stock exchanges, you can invest directly in equities. With this approach, you’ll need to learn more about the specific businesses you want to invest in. Determine which sector best fits your investment style, and then choose the best-performing businesses with a promising future.
- Mutual funds: You can invest in mutual funds, which are collective investment vehicles that pool investors’ money and invest it in stocks. You won’t be directly involved in making investments in this case. A fund manager will select the stock in which to invest. Along with any additional fees that might be assessed, you will be required to pay a fee for the fund manager’s expertise.
Debt Markets:
Here are two ways you can invest in debt markets:
- Direct investment: In the case of corporate bonds, you can invest in bonds through a private placement with the company directly. For the sale of government bonds, the RBI, which is in charge of overseeing them, organizes auctions. You can take part in these auctions in one of two ways:
- Competitive bidding: Due to the complexity of the process, larger investors, including mutual fund companies, banks, and other commercial businesses, participate through competitive bidding.
- Non-competitive bidding: For individual investors like high net worth individuals (HNI), retail investors, and the like, this is a simpler process. Online platforms can be used to accomplish this. Using the NSE goBid app, the National Stock Exchange (NSE) allows smaller investors to make direct government securities investments.
- Mutual funds: This is a deceptive approach. Regardless of whether equity or debt funds are used, the mutual fund industry operates similarly. A fund manager will select the appropriate government securities for investment. An indirect way to maintain an investment in the debt markets is through debt or hybrid mutual funds.
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