The Difference between Debt Market and Equity Market
Difference Between Equity Market and Debt Market
As an investor in the stock market, one should be aware of the basic terminology used to describe its various elements. Only with basic knowledge of the jargon can one make an informed decision about what to invest in and how to go about it.
The debt and equity market are terms you definitely should understand. For instance, in 2019, Indian companies accumulated a total of Rs. 8.68 lakh crore from domestic and overseas markets; up 20 percent from 2018. Out of the total Rs. 8.68 lakh crore, Rs. 6.2 lakh crore came from the debt market while Rs. 1.25 lakh crore came from equity markets. In comparison, in 2018, firms had raised Rs. 7.25 lakh crore in total. Nearly Rs. 6 lakh crore came through debt markets, while Rs. 79,300 crore came from equities.
To make these two terms clearer, here, we will further elucidate the difference between the equity market and the debt market.
An Overview of the Differences Between Equity and Debt Market:
Nature of investment
You invest in shares
You invest in loans
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
Much more volatile than debt market
Low on volatility
Investors are quite cautious in entering the equity market. Why? Because it is associated with higher risk. Equity markets are vulnerable to political, economic, national, and global factors.
One can be either an investor or a trader in the equity market. A company can issue shares to raise capital; when one buys these shares one becomes a shareholder in the company. If the company grows, the value of the shares rises. It is of utmost importance to understand when to hold the shares and when to let go.
Many traders buy and sell shares within a very short period of time. One can choose to hold shares over a longer span of time too.
In India, the buying and selling of shares is facilitated through a demat and trading account. A trading and a demat account can be opened with a few easy steps. All one needs to do is select a trusted financial partner that provides features like an online demat account and all-in-one trading account along with the best stock and scheme recommendations.
Types of Trades in the Equity Market
We will quickly go over the types of trades one can carry out in the equity market:
Intraday Trades:Intratrade refers to the process of buying and selling off of shares on the same day.
Buy Today Sell Tomorrow (BTST): This process enables you to sell off the shares before it is credited to one’s demat account.
Position Trades: Position trading disregards short-term price fluctuations in favour of long-term goals.
When compared to the equity market, the debt market is associated with low risk. Another standout feature of the debt market is that it can act as a regular source of income and capital preservation. Not only is the debt market less risky, it’s also less volatile in nature than the equity market. For this reason, the returns from the debt market are generally lower than those from the equity market.
In the equity market, as mentioned before, one buys and sells shares/stocks. In the debt market, on the other hand, bonds, certificates of deposits, debentures, government securities are bought and sold.
Let us understand what some of these debt instruments are:
Bonds: Both the government, as well as a company, can issue bonds. By investing in the bonds, you are effectively loaning money to the issuer of those bonds. The issuer then repays this loan, along with interest, over the course of a predetermined period of time.
Government securities or G-secs: These are issued by the RBI on behalf of the Government of India. These securities 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, it will now be easier for you to differentiate between the investment types, risks, and returns associated with the debt market and the equity market. Every time you go in for an investment, weigh your options against your goals and objectives as clarity of understanding will help you be a better investor.