Bond Market vs. Stock Market: What’s the Difference?
The bond market refers to a specialized platform where one can trade bonds as well as other debt tools, known as debt or credit markets. Corporations and governments issue bonds in situations when they must raise loans from the market. Against the bond, the company promises to pay a certain interest or coupon to the lender. And thus, bonds promise a stray stream of income to the investor. However, as these are believed to be free from market volatility, investors include bonds in their portfolios since they act as diversification instruments. Visit MultiBank Group
Bonds may be issued both by corporates as well as the government. Treasury bonds which are rolled out by the government pay interest twice a year. Given that these typically have a fixed time period which could be roughly of around five or eight years, they also have a maturity date. However, certain bonds may also be traded in the secondary market similar to how stocks are traded. Investors add bonds to their portfolios hoping for a long-term investment to gain financial independence.
Looking for the right bonds to invest in demands research and scanning through the best deals one could access. Investors draw a parallel of their returns or yields of bonds to be able to shift their funds to those which bring higher returns and have good ratings.
Stocks trade in the exchanges such as BSE and NSE. They are essentially centralized platforms that help in carrying out trades by bringing buyers and sellers on common ground. Companies issue their equities in the stock market when they want to raise equity capital from the market. Equities vary from bonds that function as debt tools. When promoters sell equities they decentralize a part of their stakes in a company to private investors.
Stock prices respond to the volatile nature of the market and it is risky to invest in them. However, stocks are very liquid instruments, which implies that they are bought and sold often to earn profit. Such exchanges happen in the stock market via stock exchanges. The market includes companies, traders, investors, arbitrageurs, brokers, sub-brokers along with many different players.
Besides the fact that stocks, as well as bonds, happen to be fundamentally different financial instruments, below are some more differences to take into account:
Maturity date: Bonds are debt instruments and hence have a maturity date. Stocks can be openly traded in the market and donít come with a date of maturity. Stocks are issued in the primary market as IPOs only to be traded in the secondary market on the basis of their values.
Returns:†Returns on bonds are relatively lower than on stocks. However, the return on the bond remains fixed, while the dividend on stocks is part of the companyís profit which is determined on the basis of performance.†
Risk: Stocks are risky. Bonds are considered to be low risk in terms of valuation and return. Bondholders are believed to be lenders and thus are among the first to have a claim on the companyís assets in case of bankruptcy. Visit MEX Group