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 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 markets and fixed income markets? ›
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 returns? ›
Equity funds primarily hold stocks and offer the potential for higher returns and risks. Income funds can generate regular income through investments in fixed-income securities but also help lower a portfolio's overall risk.
What is the difference between equity and fixed-income traders? ›
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.
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.
Why is fixed income better than equity? ›
Fixed-income securities and equities are popular investments with millions of investors in the United States. Fixed-income investments pay regular interest and tend to have less risk, making them favorable to risk-averse investors. Equities, on the other hand, can have high returns, but also tend to be riskier.
What is the fixed income market? ›
Fixed Income Market is a market that trades fixed income securities like government bonds, corporate bonds, and treasury bills. In this market, the investors receive a regular income – on a monthly, quarterly, half-yearly, or yearly basis – and repayment of principal amount on maturity.
Is income and equity the same thing? ›
As the owner of the business know that income and revenue are synonymous. Equity is your claim against the Assets of the business. It is the company's Net Worth.
Is return on equity better? ›
How to use ROE. The higher a company's ROE percentage, the better. A higher percentage indicates a company is more effective at generating profit from its existing assets. Likewise, a company that sees increases in its ROE over time is likely getting more efficient.
What is the difference between growth and income and equity income? ›
Equity-income funds invest mainly, though not exclusively, in large-cap stocks that pay high dividends while growth and income funds invest in companies for earnings growth that pay dividends. The prospectus can provide a full overview of the fund and shouldn't be overlooked.
Fixed-income markets include not only publicly traded securities, such as commercial paper, notes, and bonds, but also non-publicly traded loans. Although they usually attract less attention than equity markets, fixed-income markets are more than three times the size of global equity markets.
Why is fixed-income less risky than equity? ›
Relatively Less Volatile
The steady and stable interest payments from fixed-income products can partly offset losses from the decline in stock prices. As a result, these safe investments help to diversify the risk of an investment portfolio.
What is the difference between fixed-income and bond 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 equities and securities and bonds? ›
Buying equity securities, or stocks, means you are buying a very small ownership stake in a company. While bondholders lend money with interest, equity holders purchase small stakes in companies on the belief that the company performs well and the value of the shares purchased will increase.
What is the difference between bonds and equity securities? ›
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.
How do you distinguish between bond and equity as investment alternative? ›
If you choose to invest in a company, there are two routes available to you – equity (also known as stocks or shares) and debt (also known as bonds). Shares are issued by firms, priced daily and listed on a stock exchange. Bonds, meanwhile, are effectively loans where the investor is the creditor.
How much bigger is the fixed income market than the equity market? ›
Fixed-income markets include not only publicly traded securities, such as commercial paper, notes, and bonds, but also non-publicly traded loans. Although they usually attract less attention than equity markets, fixed-income markets are more than three times the size of global equity markets.
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.
What is the difference between equity analyst and fixed-income analyst? ›
Equity Research vs. Fixed Income Research. The key difference in fixed income is that you focus on the downside case rather than growth: What are the chances the company will violate one of its covenants?
