Debt market and equity market are two broad categories of investment available in the general investment milieu. They sit at two fag ends of a very large curve. While equity markets consist of a company’s owned capital, debts are a company’s borrowed capital. The characteristics, risk, returns, basic structure and motive, everything differs between the two of them. There is no one-size-fits-all investment product. Let’s delve deeper into the individual concepts and understand why even after being stark contrasts, they are equally important and inter-relatable at times.
Meaning of equity: Equity markets trade in shares or stocks of the company listed on the stock exchanges. A stock in a company indicates a unit in the ownership of the company. As shareholders, you become part owners of the company. The largest shareholder, with 50% or more shares, becomes the owner of the company.
Risk and return: Equity markets are riskier than debt markets. Listed shares are traded daily between the market hours. Their returns are not guaranteed. They either come in the form of dividends or by selling your investment in the market at a higher mark-up, helping you to book profits. They are highly volatile and the numbers are governed by factors such as
Returns there are correspondingly volatile as well. If held longer, equities can give you over 10-12% returns as well over a period of 7-10 years.
Research requirement: The level of research required in the debt and equity market is a bit different. Investing in stock markets requires an investor to be well-read and put in a lot of research. You need to do a careful study of financial statements, balance sheets, management and the general financial health of the company.
Here are quick pointers to understand the characteristics you need to be able to invest in stock markets:
Meaning of debt: While equity is a form of owned capital, debt is a form of borrowed capital. The central or state governments raise money from the market by issuing government securities or bonds. In effect, the government is borrowing money from you and will pay interest to you at regular intervals. The principal amount is returned on maturity. In the same way, a company raises money from the market by selling debt market securities such as corporate bonds. The debt market is made up of bonds issued by government authorities and companies.
Risk and returns: In case of government bonds, the returns are guaranteed. There is a fixed rate of return promised by the government. Corporate bonds work a similar way but there are chances of company defaults that may put the bonds at risk. Government bonds are considered risk free. Hence the returns are also moderate. This is an important difference between the debt and equity market.
Research requirement: Research requirement is comparatively lesser in bonds. Especially when you don’t engage in frequent purchase and sale of bonds like in the case of stocks, there are lesser factors that govern the interest rate you receive on the money loaned out by you.
Also, the interest rate is guaranteed by the government. In case of corporate bonds, you still need to have basic level research of the company at hand but in general, bonds do not require you to be that upbeat on a comparative note.
Following are the factors that can help you to decide if you can invest in debt markets or not:
Investors in both markets hold different levels of priority when they are brought together and are definitely not on a level-playing field. One key difference between the debt market and the equity market is that in case a company faces a default situation and has to go for liquidation, then it is the bondholders that are given priority. In all cases of default across industries, creditors are the ones that are paid off first and in this case it is the bondholders. Shareholders or the owners of the company are given last priority.
Please note: This is with respect to corporate bonds only as it almost never happens that a government defaults on a bond is issued.
Difference between equity market and debt market
|Equities are owned capital.
|Debt is a form of borrowed capital.
|Who can issue
|Companies registered with Sebi
|Low-risk because government-backed however corporate bonds are risky
|Shareholders, part owners in the company
|Creditors to the company/government
|Nature of return
|Dividends or profit booking while trading in the stock market
|interest paid by the bond issuer
|RBI and Sebi in case of corporate bonds
When it comes to how you can approach these two markets, there is not much difference between the debt market and the equity market. Both of them can be approached directly or through mutual funds however there are a few nuances that may be different.
Here are two ways you can access the equity market:
Here are two ways you can invest in debt markets:
The difference between the debt and equity market is not that complicated. It is very simple that equity markets are riskier but can give higher returns whereas the bond market is more subtle on both those factors. Within the bond market corporate bonds are riskier than government bonds. Based on your goals and risk profile you can allocate your capital towards both asset classes to achieve optimal diversification.