How does the difference between the Equity market and debt market affect the investors?

---

Introduction 

As an investor, one must make several decisions. 

Decisions like: Where should I invest?

What are my investment objectives? 

Which investment will meet my investment objectives?  

Answering all these questions is the most crucial part involved in the process of making a good investment. 

To answer these questions, you must have a basic idea of the investment opportunities.

There are numerous investments where you could invest your funds. 

Debt and Equity instruments are the two most famous ways of these investment options.  

So, dig deep into the fundamentals of these investments and understand how you could invest your money in these instruments. 

Both the Debt instruments and the equity instruments are traded in different markets. 

Namely, the Debt and Equity markets, respectively, so let us understand what is Debt and equity market in depth without any further ado. 

What is an Equity Instrument?

Equity instruments are used to fund the company’s operations by the companies relying on the equity instruments to fund their operations and provide proof to the investors of their ownership.

When any public company is required to raise funds from the market, it uses common stock or equity shares, which acts as an equity instrument for the company.  

The investors who invest in these instruments get ownership associated with their holding percentage.  

The investors of these equity instruments have a right to vote in company meetings, according to the intensity of their ownership.  

The returns to the equity instrument holder are dividends issued by the company.

What is the Equity Market?

An equity or share market is a market where shares of the companies are issued and traded, either by way of the stock exchange or other markets.

The equity market is one of the most vital areas of a market economy.

The equity market gives companies excess to issue shares and generate capital.

On the other hand, it offers investors an access to invest in the equity shares of the companies and claim their partial ownership in the company.

This gives investors the potential to realise gains in their investment based on the company’s future.

In other words, equity markets are the point where the buyers and sellers of stock can meet. 

Indian stock markets are National Stock Exchange (NSE) and The Bombay Stock Exchange (BSE).

Trading in an Equity Market

In the equity market, the investors offer a bidding price for a stock, and sellers ask for a specific price. 

When the bid and the ask rate match, there happens a trade. 

The buyer investors buy at the market price, and the seller sells at the market price. 

A company’s stocks are considered publicly traded when a company offers its stock to be traded in the stock market. 

These shares are easily traded in the stock market, and the investors are rewarded by the company’s performance as the stock price rises.

The risk in the equity market comes when the company is not doing well, and the market price of the company’s shares may fall. 

The price of a stock in the equity market also depends on the demand for that stock in the equity market.

For example, if the demand for a company’s stock is high, then the price of such stock tends to rise, and when many investors want to sell the stock, the price of such stock tends to fall.

Types of trade in Equity Market

There are various types of trade that happen in the Equity Market and they are as follows:

Intraday Trades

It is a process of buying and selling the shares on the same day. 

For example, if you buy four shares of Reliance on Monday and sell them off on the same day, then such trade is an intraday trade.

Buy Today Sell Tomorrow (BTST)

Buy today, sell tomorrow enables an investor to sell off the shares before they are credited to their Demat accounts. 

For example, if you buy four shares of Reliance and enter into buy today sell tomorrow, you could sell the shares before they are credited to your Demat account.

Position Trades

Position trading disregards short-term specifications in favour of long-term goals.

How Does the Equity Market Work?

Shares of the companies listed on the stock exchange are traded in the equity market. 

A company’s stock indicates the part of ownership in the company; the shareholder with a majority of shareholding becomes the company owner.

Equity markets are riskier than debt markets. 

A daily trade of the listed shares in the market during the market working hours happens. 

The returns on the investment in an equity market are not guaranteed; returns may come in the form of dividends issued by the companies or by selling the shares at a price higher than the investment and booking the profit. 

The equity markets are highly fluctuating, and the price of a share in the market is affected by the following factors:

•  Company’s operations.
•  Company’s Financial health.
•  Industry’s overall performance.
•  Demand and supply.

Though investing in the equity market includes risk. 

However, if it is approached with discipline, it can become one of the most effective ways to build a fortune.

Who can invest in the Equity Market?

An Equity market consists of risk and high fluctuations. To invest in an equity market, an investor must have the following characteristics:

Knowledge of the Market

“When you know better, you do better.”

Other than the time to check the stock market for a whole day, the good investor should have at least a basic knowledge of the stock market and how it works. 

The investor should understand the stock’s position and analyse the company and its operational and investment strategy. 

An investor should understand the growth pattern of the company. 

A person ready to be an active learner can gain knowledge to invest in the stock market.

Decision Making

Investors can make decisions regarding their investment and exit decisions by analysing the trends and understanding the stock exchange. 

Investors should keep an eye on the current scenario in the market. 

They should keep themselves updated about the market to make rational decisions. 

A person with good decision-making power can invest in the stock market by analysing the market.

Patience

“Keep calm and carry on.”

Investors who invest for some time and give time to the stock market to provide them returns. 

The stock market is fluctuating; thus, patience is required to play a stock exchange game. 

An investor should have confidence in his plans. 

An investor who does not get carried away by the trends and loses patience can invest in the stock market.

Risk Aversion

Investment in a stock exchange comes with risks as it is a fluctuating market. 

Thus an investor should know what risk he is taking. 

Risk aversion is one of the essential qualities of a stock market investor, which can save him from losing investments.

Different ways to invest in an Equity Market

An investor can access the equity market in the following two ways:

Direct Investment

An investor can invest directly in shares of the companies through a stock exchange. 

Investors wanting to invest directly in the stock market should research and determine which industry suits their investment needs best.

One should keep up to date regarding the companies’ current performance and the factors affecting the stock market.

Mutual funds

Mutual funds are the pooled investment vehicles. 

A pool of funds is collected from the investors and then invested in the stock market. 

Here an investor is not directly involved in the investment decision-making. 

Fund managers are appointed experts in the stock market and invest on behalf of the mutual funds. 

Here, the investor need not research the stock market. Mutual funds issue returns to the investors who invest in the units of a mutual fund. 

What are the merits and demerits of an Equity market?

There are several advantages and disadvantages of investing in the Equity Market. 

Listed below are some of the pros and cons of the Equity Market that will help you make well-informed investing decisions.

Pros of the Equity market

The pros of investing in an Equity market are as follows:

Dividends

An equity market has many stocks listed and traded daily. There are always low-risk stocks that give regular dividends. 

Risk-free dividends are considered to be better than risky capital gains.

Availability of information

Currently, the financial market is trending; thus, financial experts are always sharing valuable information on multiple platforms. 

Gaining knowledge about the stock market is not too difficult today. 

If the investors know the current articles to read and the correct platform to gain the information, they can gain a good knowledge of the stock market and make informed decisions.

Long-term growth potential

Investing in the stock market requires patience. 

If an investor is patient enough, he can earn long-term returns in the stock market. 

Not only through the price appreciation but also by compounding the dividends received throughout the period.

Risk Management

Investors can manage their risks in the stock market. Investors having a good grip on statistical methods can manage their risks in the market.

Sometimes taking risks can make an investor hit the jackpot, but risks should be calculated under the investor’s risk appetite.

Cons of an equity market

The cons of investing in the Equity market are as follows:

Volatility

Investing in the stock market comes with a risk as the stock market is highly volatile.

Share prices increase and decrease multiple times in a single day. 

These fluctuations are primarily unforeseeable that can cause risks to investments. 

The chances of a high loss in a day are less, but the market may take years to recover from a financial crash.

Brokerage can decrease the profit margins

Every time an investor does a buy or sell transaction, they have to pay a brokerage fee to the broker. 

This, in turn, can reduce profitability.

What is a debt instrument?

Debt instruments are tools an individual, government entity, or business entity can utilise to obtain capital. 

An entity uses debt instruments to procure capital and promises to pay it back. 

Credit cards, credit lines, loans, and bonds can all be types of debt instruments.

What is the debt market?

The debt market is where investors buy and sell debt securities, mostly in the form of bonds. 

India’s debt market is the largest in the whole of Asia. 

Mainly two categories of securities are in the Indian debt market— the government securities comprising central government and state government securities and the corporate bond market.

Classification of the Indian debt market

The Indian debt market is classified into two categories and they are as follows:

Government securities Market (G-Sec Market) 

It consists of central and state government securities. By issuing such securities, the government procures finance in the form of Debt. 

It is the most dominated category in the Indian debt market. 

The government of India bond is an example of Government security.

Bond market

Financial institutions’ bonds, corporate bonds, public sector unit bonds, and debentures are the main components of a Bond market. 

These bonds are issued at a fixed rate of interest. Funds are procured by issuing such bonds in exchange for fixed interest payments. 

Thus, it reduces the uncertainty in financial costs.

How does the debt market work?

The debt market is segmented into two broad types and they are as follows:

The Primary market 

A primary market is a market where the transactions occur directly between the issuer of the bond and the buys of the bond. 

It is also referred to as the new issues market. 

Companies issue brand new bonds in the primary market that have not previously been issued to the public. 

The Secondary market

A secondary market is a market where investors can purchase bonds from the broker who works as an intermediary between the selling and the buying parties. 

The securities which have already been sold in the primary market are brought and sold in the secondary market.

A debt market broadly refers to a market where buying and selling of various debt instruments by multiple entities. 

The government and the corporation issue bond and other debt instruments in the market to procure funds and pay the investor fixed returns in interest payments. 

They also promise to reply to the investment amount at the maturity date.

The transactions happen just like the stock market, where the ask and bid prices are matched.

Different ways to invest in a debt market

An investor can invest in the debt market in two ways and they are as follows:

Direct investment

An investor can directly invest in the debt market through private placements with the companies to invest in corporate bonds. 

The Reserve Bank of India, the issuer of government bonds, organises an auction to sell the bonds. 

The investor has to participate in such an auction. There are two ways an investor can participate in such auctions and they are as follows:

• Competitive bidding: Competitive bidding is complicated. Thus, large investors like banks and mutual funds participate via competitive bidding.
• Non-competitive bidding: Non-competitive bidding can be done through online portals and thus making it a more straightforward process. This is an easier process for retail investors to participate in the auction. The National Stock Exchange (NSE) has an application called goBid where any individual can invest in government securities.

Mutual Funds

Mutual funds work the same way in the debt market as in the equity market. 

It is an indirect way to invest in bonds. 

The fund manager is appointed for a mutual fund and will decide rationally which government security or bond to invest in. 

Mutual funds and hybrid mutual funds are a few ways to invest in bonds.

What are the merits and demerits of the debt market?

There are several advantages and disadvantages of investing in the Debt Market. Listed below are some of the pros and cons of the Debt Market that will help you make well-informed investing decisions.

Pros of the Debt market

The pros of investing in the Debt market are as follows:

Assured returns

One of the biggest advantages of investing in a debt market is that there is a certainty of fixed returns. 

By investing in the debt market, an investor issues a loan to the company indirectly and interest payments on loans are fixed and assured.

Risk-Free returns

Unlike the equity market, the Debt market provides fixed returns to the investor. 

The rate of interest is pre-specified and computed every year, the market factors do not affect the returns of an investor.

High liquidity

Another advantage of investing in the debt market is that debt instruments are highly liquid. 

Banks offer easy credit to the investor against government securities and other secured bonds.

Cons of the Debt market

The cons of investing in the Debt market are as follows:

Fewer returns

There is a saying that goes, higher the risk, higher the return. 

The risks involved in investing in a debt market are lesser as compared to the risk involved in investing in the equity market. 

The returns on investment in the debt market are lesser than the investment in the equity market.

No part in profits

Investment in bonds of a company comes with interests, and no part of profits is distributed to the bondholders. 

Even if the company is earning huge amounts of profit and performing exceptionally, the bondholders will get the fixed interests only.

How is the Equity Market different from the Debt Market?

For an investor, it is important to understand the difference between the Debt and Equity market before deciding on their investment choices. 

Hence, to deliver a crystal clear understanding of how the equity market differs from Debt market, we have provided an all-encompassing comparison chart providing all the details about Debt vs Equity Market.

Serial No.	Parameter	Equity Market	Debt Market
1.	Meaning	Equity is the owner’s capital. Investors become part owners by investing in the equity market.	Debt is in the form of borrowed capital; it has the same features as a loan or debt.
2.	Who can issue it?	The companies are registered with the Securities Exchange Board of India (SEBI).	Any Corporations and central or state governments.
3.	Risk.	The risk associated with the equity market is high due to the volatility.	The risk associated with government bonds is nil while the risk associated with corporate bonds is low to moderate.
4.	Returns.	Returns are high but not fixed; the returns are in the form of dividends and capital gains.	Returns are low but fixed and risk-free; the returns are in the form of interest or coupon payments.
5.	Investor’s status.	An investor who invests in the equity shares of the company becomes a part-owner of that company.	An investor who invests in the bonds of a company becomes the loan provider or Creditor of the company.
6.	Regulators.	Securities and exchange board of India (SEBI).	Reserve Bank of India (RBI) and Securities and exchange board of India (SEBI) in case of corporate bonds.
7.	Securities Traded.	Equity shares are traded in the Equity Market.	Corporate and government bonds are traded in the debt market.

Conclusion

Rational investors always make decisions after taking into consideration all the factors that affect their investment objectives. 

Selecting a market where you should invest boosts your chances of getting good returns. 

You have learned about the debt market and the equity market including the risks associated with them. 

After gaining a basic idea about how these markets work and how you could invest in these markets, you would be able to make rational decisions to meet your investment decisions. 

You could even blend your portfolio in a way that your desired risk level is met even after investing in the stock market. 

Any investor should not take blind risks, one should not invest all their funds in a single investment, and one must have multiple securities who work for them. 

The weights of risky and risk-free securities should be allocated in a way that the risk of investing in risky stocks gets reduced by investments made in risk-free securities (like government bonds).