Investments may sound complex to many, but it doesn’t need to be. Both equity and fixed-income markets help investors reach their goals. Both have their risk and return profiles, but it is easy to understand the basics with a little bit of equity market and fixed income research. The asset you invest in depends on the type of investor you are and your expected return. Let’s find the differences between the two to make an informed decision.
What is Equity Investment?
Equity investment refers to stock investment. An investor may buy individual funds or stocks with several stocks in them. Some common equity assets are stocks, mutual funds, and ETFs (exchange-traded funds). Although gains are higher with equity investment, the risks are also more significant. The equity market has zero guarantees, due to which there are chances of losing initial investments when you invest in the wrong products.
What is Fixed-Income Investment?
Fixed-income investment is safer security that is unlikely to go down. It is ideal for investors who want to protect their portfolios. Some common fixed-income investment products are bonds, treasury bills, term deposits, money market funds, and saving accounts. Since there is less risk involved, the returns are also low. However, extensive fixed income research may help you earn higher interest rates on your investments by choosing the right products.
Points of Difference
Status: Those who invest in equity have the company’s shared owner, allowing them to drive profits. Fixed income investors are creditors who can only claim their principal amount and the earned interest.
Issuing Authorities: Corporates are the leading issuers of equity. Whereas financial institutions, corporates, and government bodies issue bonds while firms issue corporate deposits.
Risks Factor: Equity investment involves significant risk depending on the market conditions and the firm’s performance. On the contrary, fixed income investment is less risky as it promises a fixed interest to the investor irrespective of the product’s performance.
Returns: Since there is a high risk involved in equity investments, the returns are also higher in the form of appreciation. The stakes are low due to guaranteed interest claims when it comes to fixed income investments.
Dividends: No dividends are involved in fixed income investments. However, in equity investments, dividends are the equity cash flow, but the management pays them at their discretion.
Asset Claims: In a bankruptcy case, equity investors are the last to claim the assets. However, for fixed income investors, the debt holders are given priority over stockholders.
Involvement: Since stock investors are also the firm owners, they receive voting rights in the company. On the contrary, bond holders do not have any right to vote or participate in company matters.
Both equity and fixed income investments are crucial for an investor’s portfolio allocation. While equity beats inflation and enhances your financial worth with higher payoffs, fixed-income investments guarantee your portfolio predictability. Therefore, a prudent investor is one who can maintain a balance in their portfolio by investing in the right combination of both, depending on their risk tolerance level. Take the help of fixed income research to understand the market and make informed decisions to maximize returns.