Understanding the Differences Between Bond Market and Stock Market
Summary:
While bond markets help you invest in bonds that primarily invest in debt securities, stock markets aid you in investing in stocks of publicly listed companies, thus becoming their shareholders.
Bonds and stocks are two popular financial instruments you can invest in for various life goals, such as building an emergency fund, accumulating money for your child’s higher education and creating a nest egg for retirement. There’s a dedicated market for both, namely the bond market and the stock market, that allows you to invest in these instruments. Read on to know how they differ from each other on various parameters.
What is a bond market?
A bond market refers to the financial market where you can buy and sell bonds. Bonds are debt securities offered by the government and companies when they want to raise money from the public. You lend money to the issuing entity through bonds for a specific period and receive interest.
Two categories of bonds primarily trade in the bond market:
- Corporate bonds: Private companies issue them to raise money from the market for expansion, financing new projects, etc.
- Government security bonds: The Government of India offers these bonds for various activities, and the Reserve Bank of India (RBI) issues them on the Government’s behalf.
What is a stock market?
A stock market is where you purchase and sell securities of publicly listed companies. The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) facilitate stock trading. When you buy stocks of a company, you become its shareholder and have a proportionate claim on its earnings and assets.
Differences between bond markets and stock markets
The table below captures the key differences between bond markets and stock markets on various parameters:
| Parameter | Bond market | Stock market |
| Nature of investment | Government and corporate entities issue bonds to fund various activities. | Ownership shares in publicly listed companies. |
| Level of risk | Comparatively lower than stocks as bonds primarily invest in fixed-income securities. | Higher than bonds as stock markets are pretty volatile and are influenced by various internal and external factors. |
| Income generation | Fixed through regular interest payments at distinct intervals. | Variable through capital appreciation and dividends paid by companies. |
| Ownership | You’ve no ownership in the issuing entity. | You’ve ownership in the issuing company. |
| Maturity date | Has a fixed maturity date which can range from months to a few years. | No fixed maturity date. You can purchase and sell stocks anytime you want to. |
| Investor profile | More suitable if you are a conservative investor who doesn’t want to take too much risk. | More suitable if you are an aggressive investor who can stomach market volatility. |
| Risk perception | Generally considered a safer investment than stocks. | Perceived as a riskier investment due to market volatility due to which stock prices may experience heavy fluctuation. |
| Return potential | Fixed but generally lower than stocks. | Comparatively higher than bonds. |
Should you invest in bond markets or stock markets?
Both bonds and stocks play an essential role in an investor’s portfolio. While bonds offer stability and fixed returns, stock investment can potentially offer you inflation-beating returns in the long run. The choice between them depends on these factors:
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Financial goals
Financial goals refer to targets you want to achieve through your investments. For short-term goals - such as going on a vacation, accumulating funds for the downpayment of a car, etc. - that are a few months to a couple of years away, you can invest in bonds. On the other hand, you can invest in stocks for long-term goals such as retirement.
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Risk appetite
This is another important consideration. Risk appetite is your ability to take risks with your investment. You can contemplate investing in stocks if you’ve an aggressive outlook and don’t get jittery with stock market volatility. However, if market swings make you nervous and you want assured returns, you can invest in bonds. To put it otherwise, if capital preservation is your priority, you can invest in bonds.
In conclusion
The right mix of bonds and stock investment makes your portfolio more balanced and achieve diversification, which helps in effective risk mitigation. That said, whether you invest in bonds or stocks, make sure to do due diligence. In case of any doubts, seek help from a professional.
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