Difference Between Equity Market and Debt Market
As an investor in the stock market, you should be aware of the basic terminology used to describe various elements to make an informed decision about what to invest in and how to go about it. The debt and equity market are terms you should be familiar with.
An Overview of the Differences Between Equity and Debt Market:
| Equity Market | Debt Market | |
|---|---|---|
| Nature of investment | You invest in markets | You invest in loans |
| Risk Involved | Riskier than the debt market | Lower risk involved |
| Nature of Returns | Reaps higher returns | Lower on returns than the equity market |
| Type of Earning | You reap dividends | You earn interest |
| Volatility | Much more volatile than debt market | Low on volatility |
Equity Market
Equity markets are vulnerable to political, economic, national, and global factors. Investors are quite cautious in entering the equity market as it is associated with higher risk.
One can be either an investor or a trader in the equity market. A company can issue shares to raise capital. If the company grows, the value of the shares rises. Many traders buy and sell shares within a very short period or one can choose to hold shares over a longer period too.
In India, the buying and selling of shares are facilitated through a Demat and trading account which can be opened easily with a few easy steps.
Types of Trades in the Equity Market
- Intraday Trades: It is the process of buying and selling off of shares on the same day.
- Buy Today Sell Tomorrow (BTST): This enables you to sell off the shares before it is credited to your Demat account.
- Position Trades: Position trading disregards short-term price fluctuations in favour of long-term goals.
Debt Market
When compared to the equity market, the debt market is associated with low risk. The debt market acts as a regular source of income and capital preservation through which the returns from the debt market are generally lower than those from the equity market.
In the equity market, you buy and sell shares. In the debt market, bonds, certificates of deposits, debentures, government securities are bought and sold.
The debt instruments include:
- Bonds: Both the government and the company, can issue bonds. Investing in the bonds, you effectively loan money to the issuer of bonds. The issuer then repays this loan, along with interest, for a predetermined period.
- Government securities or G-secs: These are issued by the RBI on behalf of the Government of India. These are offered for both the short and long terms. Short term bills with a maturity of less than one year are called Treasury Bills (T-bills) while long term instruments are called Government Bonds or Dated Securities.
- Debentures: These are issued solely by the companies and come with a fixed interest rate. You can invest in either convertible or non-convertible debentures.
With these key differences underlined, you can differentiate between the investment types, risks, and returns associated with the debt market and the equity market. Every time you go in for investment, weighing your options against your goals and objectives will help you be a better investor.