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
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 markets and fixed-income markets? ›
Equity securities are financial assets that represent shares of a corporation. Fixed income securities are debt instruments that provide returns in the form of periodic, or fixed, interest payments to the investor.
What is the difference between equity and fixed-income traders? ›
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.
What are the differences between equity and fixed-income securities Quizlet? ›
What are the differences between equity and fixed-income securities? Equity is a lower-priority claim and represents an ownership share in a corporation, whereas fixed-income (debt) security is a higher-priority claim but does not have an ownership interest.
What is the difference between equity and money market? ›
An investor can invest in any categories of funds in accordance with his requirements and risk index. For example, those who want to earn high returns over a longer period can invest in Equity Funds whereas those who want to invest for short term with reasonable return can invest in Money Market Fund.
What is the difference between equity and fixed-income returns? ›
Key Takeaways
Equity funds primarily hold stocks and offer the potential for higher returns and risks. Income funds can generate regular income through investments in fixed-income securities but also help lower a portfolio's overall risk.
Why is fixed-income better than equity? ›
Fixed-income securities and equities are popular investments with millions of investors in the United States. Fixed-income investments pay regular interest and tend to have less risk, making them favorable to risk-averse investors. Equities, on the other hand, can have high returns, but also tend to be riskier.
Is the fixed income market larger than the equity market? ›
The debt market, which includes all bonds and other debt instruments, is significantly larger than the equity market. This is because governments and companies often issue more debt than equity to finance their operations.
Is fixed income market larger than equity? ›
Fixed-income markets include not only publicly traded securities, such as commercial paper, notes, and bonds, but also non-publicly traded loans. Although they usually attract less attention than equity markets, fixed-income markets are more than three times the size of global equity markets.
What is the difference between fixed income and bond market? ›
Fixed-Income securities provide investors with a stream of fixed periodic interest payments and the eventual return of principal at maturity. Bonds are the most common type of fixed-income security. Different bonds have different term lengths depending on how long the issuer wishes to borrow for.
Equity securities represent ownership claims on a company's net assets. As an asset class, equity plays a fundamental role in investment analysis and portfolio management because it represents a significant portion of many individual and institutional investment portfolios.
How do you differentiate between fixed income and variable income of securities? ›
Unlike variable-income securities, where payments change based on some underlying measures, usually interest rates, the payments of a fixed-income security are known in advance, set at a specific interest rate which does not change.
What is the difference between equity and securities? ›
Securities are fungible and tradable financial instruments used to raise capital in public and private markets. There are primarily three types of securities: equity—which provides ownership rights to holders; debt—essentially loans repaid with periodic payments; and hybrids—which combine aspects of debt and equity.
What is a fixed money market? ›
This is a type of unit trust fund that invests in low-risk investments with an element of stable returns such as fixed deposit accounts, treasury bills or in a commercial bond. A money market fund invests mainly in fixed income securities with short investment duration and high credit quality.
Is money market equity or fixed income? ›
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 US fixed income? ›
Fixed income is a class of assets and securities that pay out a set level of cash flows to investors, typically in the form of fixed interest or dividends. Government and corporate bonds are the most common types of fixed-income products.
How much bigger is the fixed-income market than the equity market? ›
Fixed-income markets include not only publicly traded securities, such as commercial paper, notes, and bonds, but also non-publicly traded loans. Although they usually attract less attention than equity markets, fixed-income markets are more than three times the size of global equity markets.
Is the fixed-income market larger than the equity market? ›
The debt market, which includes all bonds and other debt instruments, is significantly larger than the equity market. This is because governments and companies often issue more debt than equity to finance their operations.
Is money market equity or fixed-income? ›
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.
Why is it called the fixed-income market? ›
Fixed income broadly refers to those types of investment security that pay investors fixed interest or dividend payments until their maturity date. At maturity, investors are repaid the principal amount they had invested.
