Bond Market Vs Stock Market

In this article, you will learn about the basics of Bond Market and Stock Market with more emphasis on Bond Market and later on, we'll list out some key differences between the two.

What is Bond Market?

Bond Market which is often referred to as the debt market is a place where investors buy debt securities that are brought to the market by government or publicly traded corporations.

Now you must be wondering what is a debt security, so first let's learn about debt securities.

Debt Security

Debt Security is a financial asset that is created when one party lends money to another. Debt Securities entitles their owners to a fixed stream of income from interest payments hence it is also known as fixed-income securities.

Examples of debt securities include government bonds, corporate bonds, municipal bonds, certificate of deposit etc.

I hope this is pretty much clear to you if you have any doubt regarding debt securities, leave your question in the comment section or mail us, now let's get back to Bond Markets.

Primary and Secondary Bond Markets

The bond market is also divided into two segments, primary and secondary market like the stock market.

In the primary market, the transaction occurs directly between the bond issuers and bond buyers. This means only the new issues which have not been offered to the public previously are traded in this market.

In the secondary market, investors can purchase the bonds from a broker. Here the securities that have been already sold in the primary market are bought and sold at later dates.

Types of Bond Markets:

1. Corporate Bonds:

A corporate bond is a debt issued by a company to raise capital. An investor who buys a corporate bond is actually lending money to the company in return for a series of interest payments.

Companies issue corporate bonds to raise money for financing current operations, expansion etc.

2. Government Bonds:

A government bond is a debt issued by a government and sold to investors to support government spending and obligations. Government bonds are usually considered low-risk investments as the government backs them.

Because of their relatively low risk, government bonds typically pay low-interest rates.

3. Municipal Bonds:

Municipal Bonds are locally issued by states, cities, special-purpose districts, publicly owned airports and seaports and other government bond entities who seek to raise cash to fund various projects.

4. Emerging Market Bonds:

These debt instruments are issued by countries with a developing economy. These bonds provide much greater growth opportunities, but also greater risk, than domestic or developed bond markets.

What is Stock Market?

A stock market is a place where investors go to trade equity securities, such as common stocks and derivatives including options and futures. Stocks are traded on stock exchanges.

Stock exchanges are secondary markets, where existing owners of shares can transact with potential buyers.

Stock Market and Stock Exchange are used interchangeably but a stock exchange is a subset of the stock market. The primary function of the stock market is to bring buyers and sellers together into a fair, regulated, and controlled environment where they can execute their trades.

Like the bond market, the stock market also has two components. The primary market is reserved for first-run equities i.e. initial public offerings (IPO) are issued in this market. Equities are then opened in the secondary market where the trading activity takes place.

Some Key Differences

Bonds come with a fixed date of maturity. Shares on the other hand don't have any such feature, traders can buy and sell shares as desired. However, investors may also sell bonds before its maturity.

Bonds may be issued by the government and government institutions, by municipal bodies and by financial companies. Stocks are issued by Corporates.

Stocks are comparatively riskier as compared to bonds.

Bonds also come with a fixed rate of interest that is mentioned at the time of bond issuance so earnings are more regular with bonds. Stocks may earn dividend but there is no guarantee. While bondholders earn from interest stock traders earn from buying shares at low prices and selling at higher prices.

We hope this article could give answers to all the questions that you had in mind about the bond markets and how it is different from the stock market. But still, if you have any doubt, feel free to ask your question in the comments section below or you can also mail us, we will try to give answers to questions as soon as possible.

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Bond Market Vs Stock Market