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What is the difference between equity market and debt market?

What is the difference between equity market and debt market?


The equity market represents the trading of equities known as stock market or share market. Debt market is basically a market where fixed income instruments/securities traded. The debt instruments are issued by the central and state governments, Municipal corporations, Banks, financial institutions and corporate.

The nature of equity and debt instruments are vastly different with regard to the way they generate income to the investor, the risk involved in holding them by the investor and the way they are traded.

We may distinguish them in the following table.

Equity instrument/Market Debt instrument/Market
Equity Market (Stock market) is regulated by SEBI The Government securities and bonds issued by banks and financial institutions are regulated by RBI.

The issues of corporates (non-government securities) viz. convertible and non-convertible debentures, secured premium notes, deep discount bonds etc. are regulated by SEBI.

Equity instruments (Stocks) are traded in secondary market through the stock brokers.  [Stockbroker/Sub-broker is a broker who holds registration certificate from SEBI, buys and sells securities on a stock exchange on behalf of clients for fees/commission. A broker’s registration number begins with the letters “INB” and that of a sub broker with the letters “INS”]. The Banks and financial institutions trade debt instruments directly in wholesale debt market. In retail debt market, buying and selling of debt instruments take place through primary dealers. [The Primary dealer is the registered entity with the RBI who has the license to purchase and sell government securities].
Investments in equities represent an ownership interest in the assets of the issuer company.

 

 

Investment in debt instrument represents only a financial interest. The investor in debt instruments does not get the ownership right on the company’s assets.

 

 

Public issue of equity (shares) by a company allows it to acquire funds from the investors without incurring debt.

 

 

A debt instrument issued by the issuer (Government/corporate) is basically a loan from the investor for a defined period.

 

 

An investor (shareholder) is eligible for the dividend from the earnings of a company.

However, the dividends distributed to the company out of the earnings may not be uniform all the time; it can be increased, reduced or suspended. Even bonus shares may be issued in lieu of dividends.

 

 

The issuer pays interest to the buyer of the debt instrument at a predetermined rate and schedule. Irrespective of financial burden of the company, the issuer must make the payment to the investor at contractual interest rate. No other benefit  out of the company’s income will be passed on to the holder of debt instrument.
The equity shares of a company can only be traded; the money invested in the company’s share capital cannot be withdrawn.  

The debt instrument matures on predetermined date and the issuer (Government/corporate) has to repay the principal to the investor on the date of maturity.

 

In the case of winding up of a company, the liquidator represents the interests of all creditors first. Indeed, equity holders get paid last in case of bankruptcy and may lose some or all of the principal in the case.

 

 

The chances of recovering the dues by bond holders are fairly high, in case of liquidation (winding up) of the company, as holders of debt instruments are compensated first,  before other expenses are paid.

[In case of bankruptcy, Secured creditors, such as banks lending money backed by a mortgage of land and building, hypothecation of stock, plant and machinery  (where charge is registered with ROC), will have the first claim over assets secured by them.]

 

 

Related articles:

What is debt market?

Government securities and its operators

What is yield based and price based auction of Government securities

What is money market?

What is call money market?

What is commercial paper?

Different types repos in money market

Certificate of deposit in money market

What is CBLO dealing in money market

 

 

(2) Comments

  1. Varadharajan

    In caseof winding up of a co the debt holder is compensated first only in case of debt secured against assets of the co othewise for its unsecured debt in order of priority creditor

    1. Surendra NaikSurendra Naik - Post author

      Mr.Varadarajan, thank you for your comments. Secured creditors, such as banks lending money backed by a mortgage on real estate will have the first claim over assets secured by them. I agree with you that the general creditors, are fairly high in priority but not as high as secured creditors. I wanted to compare the debt instrument with the equity instrument. Debt instrument(bonds) does create a superior claim to a company's assets in the case of liquidation compared to equity holders. Indeed, equity holders get paid last in case of bankruptcy.

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