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Sujai Adithya
Human Resource and Banking & Finance Expert
Asked a question last year

Difference between Debt Market and Equity Market?

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Sujai Adithya
Human Resource and Banking & Finance Expert

Debt markets, also known as bond markets, is a market where loan investments are bought and sold. The bond market is classified broadly into two types: Primary market and the secondary market. In the primary market, new debt securities are sold. Also, the transactions in the primary market are between bond buyers and bond issuers directly, without any brokers.

In the secondary market, bonds which have matured are bought and sold again later. Here, the transactions can be indirect, i.e., brokers can sell the bonds to investors, acting as an intermediary between the buyer and the seller.

Debt markets are generally considered to be less riskier than equity markets. But the potential of return on investment is also lower than that of equity markets. Fluctuation is relatively very less compared to stocks. Even if the company is closing down, bondholders are the first to be paid. Bonds are offered by corporations or by the government, generally at a fixed interest rate. Upon maturity the bonds retain its face value. However, depending on the ongoing rates of the newly-issued bonds, the investment value increases or decreases, and depending on that, it can be sold at a higher price or at a lower price than its face value, in the secondary market.

Equity markets are synonymous to stock markets. Equity, or stock, of a company can be bought by the investor to become a shareholder of the company. The investor can earn in two possible ways in this market. As a shareholder, he/she gets a percentage of the company profits, and these are called as dividends. He/she can also earn by selling the stock when the market price of the stock increases.

However, equity markets are considered highly risky as they are volatile and there are large fluctuations in the stock values. And if the company gets bankrupt, the investor might lose the entire stake. Yet, the potential of higher returns than other investments, make stock markets popular.