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Difference Between Equity Market and Fixed Income Market

22 Aug 2025
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In India, the equity market is characterized by the NSE and the BSE. Most of the private debt paper are also traded on the NSE and BSE, but bulk of the government debt transactions by banks and institutions happen directly in the SGL account with RBI. Just as you have equity in stock market, the stock exchanges also have the fixed income market as part of the exchange mechanism. However, it is much smaller in size and is restricted only to non-institutional players. Today fixed income trading is not as simple and popular among retail as equity trading is . Here let us look at some of the key difference between equity and fixed income markets.

Understanding the essence of equity markets and equities

Equity investments allow investors to hold partial ownership of issuing companies and such equity shares can be freely traded in the stock markets in the case of listed stocks. As one of the principal asset classes, equity plays a very important role in every portfolio; both as a risk diversifier and also as a long-term wealth generator when balanced with exposure to the equity and fixed income markets.

Let us turn to the categorization of equity investments in the stock market. There are various options available to you. You can invest in stocks and also in stock mutual funds, which can either be open ended or close ended. Within the ambit of stocks, you have common stocks and preferred stocks. Common stocks, as the name suggests, are the securities that are traded most often and give the owners the right to earn dividends declared by the company, participate in the growth of the company through capital gains and to vote in the annual general meeting (AGM) to express their individual voice. In contrast, preferred stocks offer a relatively lower risk, a degree of assured returns as dividends which may be accumulative or non-accumulative. However, preference shareholders are not entitled to vote at the AGM as they are not part owners.

How are shareholders compensated? 

They have a stake in the company but compensation comes in various ways. There is the regular flow of dividends paid out of the profits of the company in question. However, dividends are discretionary and not obligatory. Above all, the most important benefit comes from the capital appreciation from the performance of the company. In addition, equity shareholders also get the benefits of corporate actions like rights shares at discount, enhanced shares through bonus and splits as well as an indicative method to monetize their holdings through buyback of shares in case of cash-rich companies.

However, equities come with some risks too. The higher returns come with higher price volatility and risk. In the event of bankruptcy, the shareholders often get nothing as they only have a residual claim on the net assets of the company. Equity share markets are a reflection of the risks to the economy, to sectors, and to specific stocks. That is why many investors balance their exposure to both equity and fixed income markets to reduce overall portfolio risk and achieve long-term stability.

Table of Contents

  1. Understanding the essence of equity markets and equities
  2. How fixed income markets differ from equity markets?

How fixed income markets differ from equity markets?

A fixed-income security, as the very name suggests, promises fixed amounts of cash flows at fixed dates. Such fixed income securities are relatively more secure and less volatile in terms of returns and cash flows. Thus, they provide stability to any portfolio of assets, especially when balanced with exposure to the equity and fixed income markets.

Let us dwell on two types of bonds available to investors in the market. Broadly, there are coupon bonds and zero-coupon bonds (deep discount bonds).

Let us look at zero coupon bonds first. They just promise one single cash flow, equal to the face value when the bond matures. Such zero coupon bonds are issued at a discount and redeemed at par, and the difference is the CAGR yield on the bond.

On the other hand, a coupon bond pays out its listed face value upon maturity. In addition, it also pays regular interest either annually, half-yearly or quarterly, depending on the bondholder agreement. In terms of tax treatment, there is no difference between coupon bonds and deep discount bonds since interest is taxed on an accrued basis and not on receipt basis.

FAQs on Equity and Fixed income markets

What are equity markets?

Equity markets are where firms raise money by issuing shares and individuals buy and sell such shares. Equities purchase transfers ownership of the company as well as a right to profit through capital appreciation, dividends, and company actions such as bonuses or rights issues.

 

What is the fixed income market?

The fixed income market is the one in which debt securities such as bonds, debentures, and treasury bills are sold. These securities guarantee periodical payment of interest and return of principal at maturity. They are also seen as safer than equities, with stable returns but limited possibilities of growth.

 

In what ways are equity markets different from fixed income markets?

The following are the main differences between the two:

  • Equity markets: Symbolize ownership, scope for higher return, risk, but no definite pay.
  • Fixed income markets: Symbolize lending, fixed rate of interest with regular payment, relatively less risk, but restricted wealth generation.
  • Fixed income and equity markets are complementary to each other in a portfolio.


 

 

What are the principal categories of equity investments?

Equity investments can be diverse in nature:

  • Common stocks – Most liquid with voting rights and dividend potential.
  • Preferred stocks – Guaranteed dividends, lower risk, no right to vote.
  • Equity mutual funds/ETFs – Diversified portfolios of stocks managed by professionals.
  • Equity derivatives (futures & options) – For hedging or for speculation (higher risk, for sophisticated investors).

 

What are the major types of fixed income securities?

Fixed income securities comprise a number of products:

  • Government bonds – Issued by governments, safest of the bunch.
  • Corporate bonds – Sold by companies, have credit risk but potentially higher returns.
  • Treasury bills (T-bills) – Short-term debt with less than one-year maturities.
  • Municipal bonds – Sold by city governments for public projects.
  • Zero-coupon bonds – Sold at discount, redeemed at face, no regular interest.


 

How do stocks and bonds behave during varying economic cycles?

Their behavior is based on the phase of the economy:

  • Expansion: Equities increase when companies grow and profitability increases, and bonds lag as interest rates rise.
  • Recession: Bonds benefit as investors seek refuge and fixed returns, and equities decline as earnings are poor.
  • High inflation: Bonds are debased (higher interest is bad for prices), equities are volatile depending on sector.
  • Deflation/low rates: Bonds perform as yields decrease, and equities may gain from cheap borrowing.


 


 

What determines equity market prices?

A variety of factors cause equity market movements:

  • Company factors: Earnings, quality of management, leverage, new issues.
  • Economic factors: GDP growth, inflation, interest rate, policy.
  • Global factors: Oil price, currency movements, geo-political tensions.
  • Investor sentiment: Market psyche, FII/DII flows, news, trends.

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