Debt and stock markets

Picture the biggest local market you’ve visited. Typically, markets like these bustle with life and activity, isn’t it? And everywhere you look, there’s a different item up for sale. One part of the market may be exclusively reserved for vegetable vendors, while another may be occupied by endless rows of stalls selling native and exotic fruits. In yet another section, you may find small outlets selling handcrafted items. You get the general idea - different sections for different kinds of items.

The financial markets in India are also somewhat similar. There are different market segments depending on the kind of assets traded. Among these, two of the most common segments that most investors dabble in when they get started on their investment journey are the stock markets and the debt markets.

What are these markets like? What sets them apart from one another? And what assets are traded in these market segments? 

If these are some of the questions you have right now, you’re in the right place. In this chapter, we’ll get into the details of what the stock and debt markets are all about.

The stock market

The stock market, or the equity market, is where equity stocks of listed companies are traded. When companies wish to raise capital for their business, Initial Public Offerings (IPOs) are one of the many ways in which they can do so. 

Equity stocks, as we discussed in another module, represent portions of ownership in a company. In the stock markets, you’ll recall that stocks are traded through stock exchanges like NSE and BSE. When investors or traders purchase a stock of a company through the equity market, they gain a share in the ownership of that company. They will continue to hold this ownership for as long as they hold the stock(s) purchased.

How can you participate in the stock market?

To participate in the stock market, you first need to have a demat account and a trading account. A demat account allows you to hold shares in the electronic/dematerialised form, while a trading account enables you to buy and sell shares.

Once you’ve opened a demat account and a trading account, you can participate in the stock market in any of the following ways:

• As an investor 
• As a trader

If you’re an investor, you essentially invest in the stocks of listed companies for the long term. This way, you get to benefit from the long-term growth in the value of the companies’ shares.

For instance, say you purchased 100 shares of Axis Bank on November 18, 2011. At that point, the shares of Axis Bank were trading at Rs. 192.84 each. And let’s say you held the shares for around a decade. Come 2021, let’s assume that your long-term goal of sending your child off to college has gotten closer. You decide to cash in on your investment and sell the Axis Bank shares that you hold on February 17, 2021. At this point, the shares were trading at around Rs. 780.20 each.

Let’s calculate your long-term profits in this case.

On the other hand, if you are a trader, your primary goal is to take advantage of the short-term movements in the price of the stocks in the market. There are different types of trades that you can carry out in the stock market. Let’s take a look at the most common types of trading strategies that stock markets traders employ.

• Intraday trading:

In intraday trading, you buy and sell the shares within the same trading day. Essentially, you will need to square off your position before the stock market closes for the day.

• BTST trading:

BTST, or Buy Today Sell Tomorrow trading, is a strategy where you buy shares and sell them before they are credited to your demat account.

• Delivery trading:

In delivery trading, the shares you buy are credited to your demat account. You then sell them the next day or within a few days, depending on your trading goals.

How do you earn from the stock markets?

There are three ways in which you can earn from the stock market, depending on what your investment or trading goals are and based on how long you hold the shares you buy. Here’s a closer look at how you can earn from the stock market. 

• Through dividends:

Dividends are parts of their profits that listed companies pay to their shareholders. Generally, companies declare dividends annually. For long-term investors who hold dividend-yielding shares for long periods, dividends can prove to be a steady source of passive income.

• Through long-term price movements:

When investors hold the shares they buy for a long time, they can benefit from the appreciation in the price of the shares over the long-term. Of course, this may also result in a depreciation in share prices. That’s why it’s important to perform fundamental analysis and identify good stocks to invest in.

• Through short-term price movements:

Traders can benefit from short-term price movements in the stocks they buy or sell. Since markets can be highly volatile over the short term, these price movements can be profitable if you know how to take advantage of them. Technical analysis can prove to be highly useful here.

The debt market

Debt, from an individual’s perspective, typically means a loan or a borrowing. Just like how you borrow money from banks, companies and governments also rely on external funding for meeting their cash requirements. But that’s not the only way in which corporate entities and governments can access funding. They can also do this through the debt market.

The debt market consists of debt instruments like corporate bonds, debentures, and government securities, among others. These instruments are issued to the public, and when investors subscribe to these debt instruments, the money thus raised goes to the corporate entity or the government that issued the bond or security. So, in essence, the investor lends the amount invested to the issuer. In exchange, the company or the government pays out interest to the investor at a fixed rate annually or semi-annually (depending on the instrument issued).

Bonds are among the most popular instruments in the debt markets. This is often why people casually refer to the debt market as the bond market too. Specifically, the bond market is a part of the debt market.

How can you participate in the debt market?

You can participate in the debt market and, by effectively becoming the lender and loaning out money to corporate entities or governments looking for funds, you can take the simple concept of debt and turn it over, making it profitable for you. There are two ways in which you can participate in the debt market.

• The direct route:

You can directly participate in the debt market by investing in debt instruments like bonds, debentures, treasury bills, and commercial papers, among others. You can compare the returns offered by different instruments and choose the one that best fits in with your requirements and investment tenure.

• The mutual fund route:

There are mutual funds that invest primarily in a variety of debt instruments. These are known as debt funds. If you are unsure of how to go about researching debt instruments, or if you wish to rely on experts, debt funds can be a good choice since they are managed by professional fund managers.

In the upcoming chapters in this module, we’ll take an in-depth look at some of the popular debt instruments in the Indian financial market.

Debt market vs. equity market

Before we wrap up this chapter, let’s check out the key differences between the debt market and the equity market at a glance.

Wrapping up

So, that sums up what the debt and equity markets are all about. We’ll now be diving into the deep end of the debt market to understand the instruments therein. Head to the next chapter to learn about government securities.

A quick recap

• The stock market, or the equity market, is where equity stocks of listed companies are traded. 
• When companies wish to raise capital for their business, Initial Public Offerings (IPOs) are one of the many ways in which they can do so. 
• You can participate in the stock market as an investor or as a trader.
• If you’re an investor, you essentially invest in the stocks of listed companies for the long term and you get to benefit from the long-term growth in the value of the companies’ shares.
• If you are a trader, your primary goal is to take advantage of the short-term movements in the price of the stocks in the market. 
• You can execute intraday, BTST or delivery trades in the stock market.
• Your earnings from the stock market can be in the form of dividends or profits from price movements.
• The debt market consists of debt instruments like corporate bonds, debentures, and government securities, among others. 
• These instruments are issued to the public, and when investors subscribe to these debt instruments, the money thus raised goes to the corporate entity or the government that issued the bond or security.  
• You can directly participate in the debt market by investing in debt instruments, or, you can invest in debt mutual funds.