Difference Between Debt & Equity
Stock market offers innumerable opportunities for everyone to create wealth. As an investor, we should know the ins and outs of the different financial assets and then choose that which suits our goals. Our financial condition and commitments differ and so one size fits all strategy has no relevance in stock market. Personalized investment solution is the need of the hour. There are financial advisors whose major role is to prepare a particular financial plan for you and guide you throughout your investment journey. As risk taking nature varies from person to person, the financial asset one chooses also varies accordingly. Largely, investors either prefer debt or equity. One has to have a clear understanding of the differences between debt market vs. equity market. This article tries to give you a clear cut picture about the differences of debt vs. equity markets.
Debt vs Equity
|1||Meaning||Invest in loans||Invest in shares of company|
|2||Risk||Low risk||High risk|
|5||Nature of Return||Fixed and Regular||Irregular(based on company's performance)|
Debt Market is associated with low risk in comparison to equity market and also debt market assures regular income and capital preservation. Equity market is more riskier than debt market and is usually volatile. When you invest in equity, you become a shareholder of the company and you may receive profits of the company in the form of dividends. The returns from equity are also comparatively higher than the debt instruments. In equity market, shares are bought and sold. Debt market: Here, bonds, certificates of deposits, debentures, G-Secs are sold.
Bonds: A bond can be issued by a government or a company. The investor in bond simply lends money to the bond issuer and in turn the bond issuer offers to repay the loan on a particular maturity period. The bond issuer also pays interest to the investor on a regular basis till the tenure of the loan.
G-Secs: These are issued by the RBI on behalf of government of India. These pay a fixed coupon and are either for a short term or a long term period.
Debentures: These are issued by companies and bear a fixed rate of interest. Some debentures are convertible i.e. they can be converted into equity shares whereas non-convertible debentures cannot be converted into equity shares.
Mostly, investors are hesitant to enter the equity market as they are afraid of losses. Equity markets are vulnerable to political, economic, national and global factors.
One can either be an investor or a trader in equity markets. Any company issues shares for the sake of rising capital. When you buy shares of the company, you become a shareholder. As the company is poised to grow, the value of your share also increases in due course of time. It is very essential to know when to hold and when to sell the stock.
Traders buy and sell shares within a short period of time. You can also invest in shares to achieve long term goals. To buy and sell shares, you should hold a demat and trading account. Now, let us know about different types of trading.
Delivery: The shares you buy get credited to your demat account. The Indian stock exchanges function from 9.15 am to 3.30 pm from Monday to Friday.
Intraday: Here, one buys and sells shares on the same day itself. You have to square off your position by 3.10 pm.
Buy Today Sell Tomorrow (BTST): You can sell the shares before it gets credited to your demat account by this process.
You have to monitor the stock market constantly to buy or sell stocks at the appropriate time. If you are hesitant to invest directly into equity, you can get into the equity market even via mutual funds. Hope you got a clear understanding of the difference between equity and debt market by reading this article.