As an investor, it is common to be continuously on the chase to find better investment options. One of the main considerations for many investors is the return on investment. While the returns are important, different investors make different decisions based on how comfortable they are with taking risks. Some are more likely to incline towards taking higher risks in order to get potentially higher returns.
Whereas, some other investors may prefer having a lower but stable return that comes along with lower risks. In this article, we will mainly explore between equity markets and fixed income markets. Let us dive in to have a look at both of these types of investment and differentiate them to understand their pros and cons better.
What are Equity Markets?
Equity stocks are stocks that are offered by companies which publicly trade on the stock market. Equity investment refers to buying these stocks. In addition to buying stocks, equity investment also spans buying stock-related mutual funds into its umbrella. The securities in the equity markets are stocks. It is also possible to trade or invest in derivatives such as futures and options. However, it is best to get your fundamentals right with equity markets before trying your hand at derivatives as they are a high risk-high reward trading instrument.
There are 2 types of equity markets – common stocks and preferred stocks. By investing in preferred stocks, you can claim dividends but do not have any voting rights. With common stocks, you get the right to vote and also get to claim profits. You can trade in equity markets using any strategy. Some of the most common strategies that are used by many investors are fundamental analysis, technical analysis, price action, and others.
The main logic behind investing in equity stocks is that the price of your investment would grow and the equity stock grows. This comes with a certain percentage of risk as the performance of the stock or company depends on many factors such as the performance of the market, growth of their products, their management, etc. It is also possible for the company’s stock price to experience a downtrend incessantly in case there is a fundamental problem with the company. So, it is best to analyse all of these parameters before investing in an equity stock.
What are Fixed Income Markets?
Fixed income markets consist of fixed income instruments that offer guaranteed returns in a routine manner. Usually, such instruments are backed by a credible guarantor such as the Indian government. Fixed income markets pose lesser risks to your capital. At the same time, while your returns are guaranteed, the returns may not be as extravagant as that produced by equity stocks. Some of the fixed-income instruments are RBI taxable bonds, debt securities, provident funds, debt mutual funds, senior citizen saving schemes, and others. With the fixed income markets, you can expect to receive a fixed amount in regular intervals. You can avail of the principal amount during the time of maturity.
In contrast with equity markets, fixed income markets are less interested in capital appreciation and do not pursue aggressive strategies. If you would like to minimize the risk in the stock market and are comfortable with gaining lesser but stable returns, fixed income markets may be a good option. The maturity of these fixed income bonds can start at 3 months and can extend to several decades.
Difference Between Fixed Income and Equity Markets
Both fixed income markets and equity markets can potentially provide a great yield. However, the degree of rewards vary as the amount of risk differs as well. Let us have a look at some of the main differentiation factors between equity markets and fixed income markets.
To be profitable in the equity markets, you would have to perform extensive research. It is important to understand the fundamentals of equity stocks and dig deep into the details of each stock. It can also be helpful to develop your own investment strategies according to your investment style. When it comes to fixed equity markets, you would not be required to develop any strategies as the investment methodology is quite straightforward.
In equity investment markets, every investor is considered to be the owner of the company to a certain degree. Especially with common stocks, as an investor, you will also have voting rights, thereby making you an owner of the company in accordance with the amount of shares they own in the company. If you invest in equity markets, you will have the first right on the profits made. These profits will sometimes be paid out as dividends if the company has no other obligations such as reinvesting in the business or using the revenue for mergers. With Fixed income markets, you would not have any voting shares or rights in the profit.
Risk to Reward Ratio
Equity stocks provide more returns while also putting your invested capital at a higher risk in comparison. The returns provided by the stock market are very uncertain and depend on the overall performance of the index and the performance of the particular company. On the other hand, fixed income comes with certainty on your investments. After you invest in a bond, your returns are assured irrespective of the volatility and fluctuations in the market.
Claim to Assets
In the case of bankruptcy, equity stockholders lose all of their investment. However, most companies liquidate their assets to generate some cash in order to repay their stockholders. Once this is available, bondholders get to first claim their amounts after which equity shareholders will be settled for their investment in the company.
In a Nutshell
Both fixed income markets and equity markets are potential grounds to grow your wealth. The difference between the two mainly are the amount of risk that is brought along and the amount of returns that are provided. Make sure that you understand your risk capacity in order to make the right decision when it comes to your investment plan.