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 income and fixed income? ›
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 equity and fixed income benchmarks? ›
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 is the difference between equity and money market? ›
What is the difference between an equity and money market? An equity market trades in stocks and aims to offer higher returns through capital appreciation. A money market handles short-term investments, focusing on liquidity, thus, generating lower returns against a reduced investment risk.
What is the difference between market and equity? ›
Key Takeaways. Market capitalization is the total dollar value of all outstanding shares of a company. Equity is a simple statement of a company's assets minus its liabilities. It is helpful to consider both equity and market capitalization to get the most accurate picture of a company's worth.
What is the difference between equity market and fixed income market? ›
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 are the differences between equity and fixed-income securities Quizlet? ›
Fixed-income (debt) security pays a specified cash flow at pre-contracted time intervals until the last payment on the maturity date. Equity has an indefinite life.
What is the difference between equity and fixed assets? ›
While both equity and assets are essential components of a company's balance sheet, they serve different purposes: Equity: Represents ownership and is the source of funds to create assets. Assets: Necessary for business operations and include fixed assets (long-term) and current assets (short-term).
What are the advantages of fixed-income and equities? ›
Fixed-income securities are generally less risky than equity securities. This is because the interest payments on fixed-income securities are typically contractually obligated, whereas dividends on equity securities are not.
Why is fixed-income safer than equities? ›
Fixed income as an asset class is generally less volatile than equities (stocks), and is considered to be more conservative. A well-diversified portfolio should have some allocation of fixed income. For some investors, this allocation increases as their investment time horizon shortens (e.g., as retirement approaches).
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 and money? ›
What Is the Difference Between Cash and Equity? The difference between cash and equity is that cash is a currency that can be used immediately for transactions. That could be buying real estate, stocks, a car, groceries, etc. Equity is the cash value for an asset but is currently not in a currency state.
What is equity money market? ›
The investment objective of Equity Investment Bank Money Market Fund is to preserve capital, liquidity and generate regular income. The Fund primarily invests in treasury bills and bonds, commercial papers and cash with a short to medium term investment horizon.
What do you mean by fixed-income? ›
Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year and repay the principal amount on maturity.
What is equity market in simple words? ›
Equity market is a place where stocks and shares of companies are traded. The equities that are traded in an equity market are either over the counter or at stock exchanges. Often called as stock market or share market, an equity market allows sellers and buyers to deal in equity or shares in the same platform.
Is fixed-income the same as bonds? ›
Bonds – also known as fixed income – are essentially an IOU. Governments and companies borrow money when they issue bonds, then promise to repay it at the end of the bond's life. A bond exchange-traded fund (ETF) is a collection of bonds that trades on an exchange, like stocks do.
Is it better to work in equity or fixed-income? ›
For investors, equity investments offer relatively higher returns than fixed income instruments. However, higher returns are accompanied by higher risks, which are made up of systematic risks and unsystematic risks.
What is equity income? ›
What Is Equity Income? Equity income primarily refers to income from stock dividends, which are cash payments from companies to their shareholders as a reward for investing in their stock. In other words, equity income investments are those known to pay dividend distributions.
What is considered a fixed-income? ›
Key Takeaways. Fixed income refers to assets and securities that pay a set level of income to investors, typically in the form of fixed interest or dividends. Government and corporate bonds are the most common types of fixed-income products.
