The trading market can be divided into two distinct categories: debt and equity. The market for debt instruments is also known as the bond market, and there is no singular physical exchange platform. The exchanges typically take place between independent investors, institutions or brokers. Meanwhile, the equity market, also commonly known as the stock market, is the domain for buying and selling stocks. Multiple marketplaces such as the London Stock Exchange, Bombay Stock Exchange and New York Stock Exchange fall under the umbrella of the stock market. Read on to know more about the debt and equity market.
Debt security investments generally have lower returns in comparison to equities. However, since debt investments do not fluctuate as much as stocks, the risk involved is also much less.
Moreover, in the event that a company has to be liquidated, the business’ bondholders are paid first.
The most common debt instrument is a bond. Bonds are issued by the government and corporations with the purpose of raising funds for their undertakings and business operations. The interest rates for these investments tend to be fixed, and while they may be unsecured, third-party agencies attest to the integrity and legitimacy of the bond issuer in the form of ratings.
Additionally, note that bonds can be resold by the original buyer in the secondary market. While the sold bond retains the face value, the true net profit or yield will be lost as a certain amount as interest will have already been paid. Depending on the interest rate fluctuations in the market and the time period for a particular bond to reach maturity, the current actual value of the bond may be more or less than its face value. Hence, it may be sold at a discount or premium according to where its face value currently stands.
Corporations and companies can offer a share of the business owners in the form of stock or equity. The owner of this stock ie: shareholders, can make a profit from the dividends that are drawn from the company’s net profit. In addition to that, if the market price of the stock goes up, the shareholder can also make a profit from the sale of the stock at that point.
However, there are risks that come with equities trading and investments. If a company goes bankrupt, all investors lose their shares. The equity market is known to be quite volatile and the price fluctuations can be substantial, regardless of the integrity of the company. Factors such as large scale social or political upheavals, government policies or changes, events in the economy like recession, etc. all influence the equity market. Nonetheless, stock market trading, particularly when holding long-term positions and investing in the growth of the economy through publicly listed companies can be quite lucrative.
The debt and equity markets both have their unique features, plus points and risks. It is advisable to diversify and maintain a good debt to equity ratio in your investment portfolio. As an investor, thorough research and analysis of the investment options in the market is integral to your success. A considerable chunk of the finance industry focuses on analyzing and predicting market and price movements, and you can utilize their research to your advantage. Online tools and apps that provide services like stock watch lists, price alerts and expert insights can come in handy.
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