Equity Markets vs. Fixed-Income Markets: An Overview
The major differences between equity and fixed-income markets are the types of securities traded, the accessibility of the markets, the levels of risk, the expected returns, the goals of investors, and the strategies used by market participants. Stock trading dominates equity markets, while bonds are the most common securities in fixed-income markets. Individual investors often have better access to equity markets than fixed-income markets. Equity markets offer higher expected returns than fixed-income markets, but they also carry higher risk. Equity market investors are typically more interested in capital appreciation and pursue more aggressive strategies than fixed-income market investors.
Key Takeaways
- The major differences between equity and fixed-income markets are the types of securities traded, the accessibility of the markets, the levels of risk, the expected returns, the goals of investors, and the strategies used by market participants.
- All equity markets, no matter the type, can be volatile and experience significant price highs and lows.
- Due to the lower risks and rewards, strategies are often far less varied in fixed-income markets than equity markets.
- The growth of exchange traded funds (ETFs) has transformed equity and fixed-income markets while blurring the lines between them.
Equity Markets
Equity markets involve the purchases and sales of stocks, conducted on regular trading exchanges. Investors obtain partial ownership of corporations in equity markets, while bonds are solely interest-earning investments. The Nasdaq and the New York Stock Exchange (NYSE) are among the best-known equity markets. All stock markets, no matter the type, can be volatile and experience significant price highs and lows.
In equity markets, the shares of individual companies are sold to the public in initial public offerings (IPOs) and continue to trade on exchanges after that. Most retail investors are comfortable buying and selling stocks in equity markets. Furthermore, many brokerages charge low or no fees for trading them. They also offer ways to trade fractional shares, so high-priced stocks are available to small investors. Equity markets are generally very accessible.
The high risks and sometimes spectacular profits in equity markets led to the development of multiple strategies, such as growth investing and value investing. A high degree of success in equity markets usually requires greater amounts of research and follow-up on investments than is necessary for fixed-income investments. There are also widely divergent approaches to trading in equity markets, from high-frequency trading to buy and hold. Some traders in equity markets try to enhance gains by using leverage, while others try to reduce risks by hedging.
Beating equity markets is hard rather than easy, so many investors are better off with index funds.
Fixed-Income Markets
The fixed-income market is more commonly referred to as the debt securities market or the bond market. It consists of bond securities issued by the federal government, corporate bonds, municipal bonds, and mortgage debt instruments. The bond market is referred to as a capital market since it provides capital financing for long-term investments.
Debt security investments are generally seen as less risky than equity investments. As such, they typically offer lower potential returns. Debt security investments were traditionally traded over the counter (OTC) instead of being centrally traded on exchanges. Fixed income securities are often issued at auctions, such as the U.S. Treasury department's bill auctions.
TreasuryDirect is the only way that most investors directly access the fixed-income market. Mutual funds are a far more common way to access corporate bonds in fixed-income markets than participating in the over-the-counter market,
Due to the lower risks and rewards, strategies are often far less varied in fixed-income markets than equity markets. The goal is usually to assure the safety of the principal by purchasing only bonds with an investment-grade credit rating. Within those narrow limits, fund managers and investors often look for higher yields. However, capital appreciation is also possible under specific scenarios. The prices of zero-coupon U.S. Treasury bonds can move up substantially as interest rates fall. When distressed credit markets clear up, fallen angels sometimes return to investment-grade status and experience significant price gains in the process.
Special Considerations
The growth of exchange traded funds (ETFs) has transformed equity and fixed-income markets while blurring the lines between them. ETFs may hold any combination of stocks or bonds, but they trade on stock exchanges. ETFs often have reasonable prices, below $100 per share, so they are accessible to all investors. That is more important for bonds, as many small investors could not trade them so easily before.
With ETFs, investors achieve instant diversification and can often determine the quality of securities by merely looking at the label. For example, an investment-grade bond ETF would be an easy way to earn more income than in a savings account with limited risk. For stocks, ETFs offer a substantial reduction in idiosyncratic risk and easier access to foreign markets.
FAQs
Equity markets offer higher expected returns than fixed-income markets, but they also carry higher risk. 1 Equity market investors are typically more interested in capital appreciation and pursue more aggressive strategies than fixed-income market investors.
What is the difference between equity market and fixed income market? ›
While equity markets have the potential of giving higher returns in the short run, the returns are not guaranteed and thus increases the risk. The fixed income markets, on the other hand, offer stable returns and thus lower risk, but the returns might also be modest.
What are the differences between equity and fixed income securities Quizlet? ›
What are the differences between equity and fixed-income securities? Equity is a lower-priority claim and represents an ownership share in a corporation, whereas fixed-income (debt) security is a higher-priority claim but does not have an ownership interest.
What is the difference between equity and money market? ›
An investor can invest in any categories of funds in accordance with his requirements and risk index. For example, those who want to earn high returns over a longer period can invest in Equity Funds whereas those who want to invest for short term with reasonable return can invest in Money Market Fund.
What is the difference between the financial market and the equity market? ›
The financial market is where all trades involving financial assets happen. The capital market is where companies and governments go to raise long-term capital. The stock market is where people buy and sell equity in listed corporations. The bond market is where people buy and sell bonds.
What is the difference between equity and fixed-income benchmarks? ›
Equity income refers to making an income by trading shares and securities on stock exchanges, which involves a high risk on return concerning price fluctuations. Fixed income refers to income earned on deposits that give fixed making like interest and are less risky.
What is the difference between a bond market and a fixed-income market? ›
Fixed-Income securities provide investors with a stream of fixed periodic interest payments and the eventual return of principal at maturity. Bonds are the most common type of fixed-income security. Different bonds have different term lengths depending on how long the issuer wishes to borrow for.
What is the difference between equity income and fixed-income? ›
Equity securities are financial assets that represent shares of a corporation. Fixed income securities are debt instruments that provide returns in the form of periodic, or fixed, interest payments to the investor.
What is the difference between equity and fixed-income ETF? ›
Both equity and fixed-income products are financial instruments that can help investors achieve their financial goals. Equity investments generally consist of stocks or stock funds, while fixed income securities generally consist of corporate or government bonds.
What is the difference between equity and fixed assets? ›
Equity is the source of the funds required to create assets to run and grow a business. On the other hand, assets are economic resources necessary to run the business. Assets can be classified as fixed assets or current assets based on the liquidity of the assets.
We generally think of the term "fixed income" as synonymous with bonds. In reality, a bond is just one type of fixed income security. The difference between the money market and the bond market is that the money market specializes in very short-term debt securities (debt that matures in less than one year).
What is the difference between equity market and cash market? ›
Shares of stock market listed companies are bought/sold. Equity share trading is roughly in two forms - spot/cash market and futures market. These are the different types of equity market in India. The spot market or cash market is a public financial market in which stocks are traded for immediate delivery.
What is equity and equity market? ›
The terms “equity market” and “stock market” are synonymous. Both refer to the purchase and sale of ownership in public companies via shares through any of the many stock exchanges and over-the-counter markets around the world. The equity market has become one of the most important and vital areas of a market economy.
What is considered fixed-income? ›
Fixed income is a class of assets and securities that pay out a set level of cash flows to investors, typically in the form of fixed interest or dividends. Government and corporate bonds are the most common types of fixed-income products.
What is the difference between equities and bonds? ›
The debt and equity markets serve different purposes. First, debt market instruments (like bonds) are loans, while equity market instruments (like stocks) are ownership in a company. Second, in returns, debt instruments pay interest to investors, while equities provide dividends or capital gains.
What is the function of the equity market? ›
Equity markets facilitate the raising of equity capital. This is important for entrepreneurs who have a business idea but do not have the capital on-hand to start the business themselves. Banks are debt investors who are unlikely to provide a loan to these businesses without collateral or an abnormally high return.
Is money market equity or fixed-income? ›
A money market fund is a type of fixed income mutual fund with very stringent maturity, credit quality, diversification, and liquidity requirements intended to help it achieve its goals of principal preservation and daily access for investors.
Are mutual funds fixed-income or equity? ›
Mutual funds are professionally managed investment portfolios that are made up of different asset classes such as equities (i.e. stocks) and fixed income (i.e. bonds). Each mutual fund has a defined investment objective that determines the overall objective of the fund and the types of investments that can hold.
What are the two types of equity markets? ›
Equity share trading is roughly in two forms - spot/cash market and futures market. These are the different types of equity market in India. The spot market or cash market is a public financial market in which stocks are traded for immediate delivery.
What do you mean by fixed-income market? ›
Key Takeaways. Fixed income is a class of assets and securities that pay out a set level of cash flows to investors, typically in the form of fixed interest or dividends. Government and corporate bonds are the most common types of fixed-income products.
