Equity Market
An equity market is defined as a platform where both individuals and institutional investors purchase stocks and stock related mutual funds. When an investor invests in a stock, they get to own a share of the assets of a firm and their revenues. They are also convinced of the growth story of a business and believe that their investments grow as the firm grows. However, there is a risk that the company might suffer losses, and their investments will be gone.
The equity market of a firm is further categorised into two types – preferred stocks and common stocks. Preferential stock owners get a claim on the dividends (Their claim is more than owners of common stock), but they do not get any right to vote. The common stocks can also grant the investors a right to vote in the shareholders’ meetings in addition to claiming the profits.
Fixed Income Market
A fixed income market is defined as a platform for trading where both individuals and investors trade in securities (like bonds) that guarantee a fixed income percentage on their investment. These cash flows are also paid out for fixed amounts on regular intervals as well as the principal at maturity. The returns for these financial instruments might not be that great, but they do provide a secured investment. Fixed income can be bonds – corporate deposits, zero coupon or coupon. They may be issued by corporations or sovereign entities like governments or municipalities. The maturity for these instruments can range from three months to several decades. The investment grade bonds are also considered as the safest, and they give lower returns, while junk bonds give much better returns, but they have a low credit rating with a greater chance of default.
Difference between Equity Market and Fixed Income Market
Both equity and fixed income markets perform a very important role in helping companies raise adequate amounts of capital to help finance their businesses. Companies can use these two financial instruments to take care of their short term and long term monetary needs. However, it must be noted that there are major points of difference between the equity market and fixed income market, and we should focus on those points below to get a wider perspective of these two instruments:
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An equity market is defined as a platform where both individuals and institutional investors engage in the activity of purchasing stocks and stock related mutual funds. |
A fixed income market is defined as a trading platform where both individuals and investors trade in securities like bonds which guarantee a fixed percentage of income on their investment. |
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The issuers in the equity markets are mainly corporates. |
The issuers in fixed income markets are mainly government institutions and financial institutions. |
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The risk is considerably higher for the financial instruments issued and traded in the equity markets. |
The risk is considerably lower for the financial instruments issued and traded in the fixed income markets. |
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The overall returns are considerably higher for the financial instruments issued and traded in the equity markets. |
The overall returns are considerably lower for the financial instruments issued and traded in the fixed income markets. |
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In the case of bankruptcy, the equity market instruments have the last claim to the assets of a company. |
In the case of bankruptcy, the fixed income market instruments have the first claim to the assets of a company. |
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The investors in the equity market instruments have voting rights and are part owners of the company. |
The investors in the fixed income market instruments have no voting rights and do not have any claim to the ownership of the company. |
Conclusion
There are a number of points of difference between equity and fixed income markets. But both of them perform a very crucial role in the functioning of the financial markets. It then becomes essential that there are more individuals and corporations who use these instruments for their financial gains. Both these financial instruments have a part to play in the overall development and growth of the economy of our country, both in the short as well as the long run.
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