Difference between Debt Market & Equity Market

What is Equity Market?

A marketplace where the shares of publicly listed companies trade is called an equity market. It is also commonly referred to as the ‘stock market.’ While a private company can only expand and develop to a certain extent with the help of its promoters and early investors, it needs additional funds to grow bigger in size. This can be done by going public and sourcing funds from investors through the equity market. The equity market is regulated by the Securities and Exchange Board of India (SEBI).

Investors can either subscribe to the company’s Initial Public Offering (IPO) and gain ownership of shares or buy them from the open market once they get listed. Once the shares of a company get listed on the stock exchange, they become available for trading. In the equity market, buyers can purchase shares from sellers at an agreed price. The price changes according to the demand and supply. If the sellers outweigh the buyers, the price drops, and if the buyers outweigh the sellers, the price rises.

What is Debt Market?

On the other hand, a marketplace where debt securities are purchased and sold is known as the debt market. It is also commonly referred to as the ‘fixed-income securities market.’ Corporate bonds, government bonds and corporate debentures are some of the securities traded in this market. Investors mainly enter the debt market to park their money for a fixed period.

Financial institutions may also offer bonds to raise money from the public. Those who invest in bonds are promised a set percentage return on the principal amount. This interest rate or coupon rate is fixed and predetermined while issuing the bonds. This is why these securities are also called ‘fixed-income securities.’

These financial instruments have a predetermined ‘maturity period’ within which the issuer returns the principal amount plus interest to the investors. These instruments act as loans from the investors on which the borrowing institution pays interest. The debt market is regulated by SEBI as well as the Reserve Bank of India (RBI).

Debt Market & Equity Market Difference

There are several differences between the debt and equity market:

1. Issuing Party: In the case of equities, the issuer is a corporate looking to gain funds from the public for the long term. However, in the debt market, the issuer of securities is either a corporate or a government that needs funds for a specific period.
2. Post-investment Status: When investors buy the shares of a company in the equity market, they become part-owners or shareholders of the company. On the other hand, bondholders are creditors or lenders and are entitled to receive interest income for a definite period.
3. Extent of Risk: Shares traded in the stock market are subject to market fluctuation.  For instance, if a company becomes insolvent, its shareholders can lose out on their investment. Meanwhile, if a bond issuer goes bankrupt, the bond investors are compensated first, whereas shareholders are repaid last (after preference shareholders). Hence the equity market can be riskier than the debt market.
4. Return on Investment: In the equity market, the return on investment comes in the form of appreciation in share price, dividend payouts or bonus shares. This return is received when a business performs exceptionally well or distributes its profits with its shareholders. In the contrast, bond owners earn returns through their fixed-interest payouts, which must be disbursed irrespective of how the company performs. If the bonds are tradable, gains through capital appreciation are also possible.
5. Price Volatility: As mentioned earlier, share prices fluctuate day in and day out. The frequency of price movement of shares is much greater than that of debt securities.
6. Regulatory Bodies: The equity markets are governed by a single body, i.e., SEBI, whereas the debt securities market also has regulatory oversight from the RBI.

Investors may choose between the two markets based on their risk appetite and their investment objective. For example, if you wish to make quick gains through trading activities and do not mind taking risks, equity markets are for you. But if you are looking for a steady income in a fixed timeframe with reduced risk, you can enter the debt securities market.