Anupama Nair
www.mediaeyenews.com
Is there any difference between debt market and equity market? Read on to know the difference. The debt market is the market where debt instruments are traded. Debt instruments are assets that require a fixed payment to the holder, usually with interest. Examples of debt instruments include bonds (government or corporate) and mortgages. In a debt market, bondholders do not gain ownership in the business or have any claims to the future profits of the borrower. The borrower's only obligation is to repay the loan with interest.
The Indian debt market, which is considered as one of the largest in Asia, is developing rapidly buoyed by a multitude of factors including new instruments, increased liquidity, deregulation of interest rates and improved settlement systems. The major players in the Indian debt markets today are banks, financial institutions, insurance companies, FIIs and mutual funds. The instruments in the market can be broadly categorized as those issued by corporates, banks, financial institutions and those issued by state or central governments.
The major risks associated with any investments are credit risk, interest rate risk, settlement risk and liquidity risk. While corporate papers carry credit risk due to changing business conditions, government securities are perceived to have zero credit risk. Interest rate risk is present in all debt securities and depends on a variety of macro-economic factors. The largest section of the Indian Debt market consists of the securities of the Government Securities ,where the daily trading volume is more than Rs.10,000 crore, with instrument tenors ranging from short-dated Treasury Bills to long dated securities extending up to 30 years.
The Corporate bond market, which offers less liquidity, is also fast developing with an increased contribution from the banks, Financial Institutions, mutual funds, provident funds, insurance companies and cash-rich corporates. There are also large numbers of instruments available like MIBOR-linked bonds, commercial papers and medium to long fixed and floating rate bonds. The yield curve usually inclines to be positive sloping i.e., yield of shorter-dated securities being lower than that of longer-dated ones.
The money markets in India fundamentally consist of call money market i.e., market for overnight and term money between banks and institutions, repo transactions, CBLO, commercial papers certificate of deposits (CDs, issued by banks) and Treasury Bills (issued by RBI).
An equity market is a market in which shares of companies are issued and traded, either through exchanges or over-the-counter markets. It is also known as the stock market, which is one of the most vital areas of a market economy. It gives companies access to capital to grow their business, and investors a part of ownership in a company with the potential to realize gains in their investment based on the company's future performance.
When companies are born they are private companies, and after a certain time, they launch an initial public offering or IPO, which is a process that turns them into public companies that trade on a stock exchange. Private stocks operate slightly in a different way as they are only offered to employees and certain investors.
Some of the largest equity markets, or stock markets, in the world are the New York Stock Exchange, NASDAQ, Tokyo Stock Exchange, and Bombay Stock Exchange. Companies often list their stocks on an exchange as a way to obtain capital to grow their business. An equity market is a form of equity financing, in which a company gives up a certain percentage of ownership in exchange for capital which is used for a variety of business needs. Equity financing is exactly the opposite of debt financing, which utilizes loans and other forms of borrowing to obtain capital.
In an equity market, investors bid for stocks by offering a certain price, and sellers on the other hand ask for a specific price. When these two prices match, a sale occurs. Often, there are many investors bidding on the same stock. When this occurs, the first investor to place the bid is the first to get the stock. When a buyer will pay any price for the stock, they are buying at market value, the seller will take any price for the stock, and they are selling at market value. When a company offers its stock on the market, it means the company is publicly traded, and each stock represents a piece of ownership. These appeals to investors, and when a company does well, its investors are rewarded as the value of their stocks rise.
The risk comes when a company is not doing well, and its stock value may fall. Stocks can be bought and sold easily and quickly, and the activity surrounding a certain stock impacts its value. For example, when there is a high demand to invest in the company, the price of the stock tends to rise, and when many investors want to sell their stocks, the value goes down.
Stock Exchanges can be either physical places or virtual gathering. Nasdaq is an example of a virtual trading post, in which stocks are traded electronically through a network of computers. Electronic trading posts are becoming more common and a preferred method of trading over physical exchanges.
The New York Stock Exchange or NYSE on Wall Street is a famous example of a physical stock exchange; however, there is also the option to trade in online exchanges from that location, so it is technically a hybrid market. Most large companies have stocks that are listed on multiple stock exchanges throughout the world. The companies with stocks in the equity market range from large-scale to small, and traders range from big companies to individual investors.
Most buyers and sellers tend to prefer trading at larger exchanges, where there are more options and opportunities than at smaller exchanges. However, in recent years, there has been an uptick in the number of exchanges through third-party markets, which bypass the commission of a stock exchange, however pose a greater risk of hostile selection and will not guarantee the payment or delivery of the stock.
In a physical exchange, orders are made in ‘open outcry format’, which is suggestive of the depictions of Wall Street that we see in the movies i.e., traders shout and display hand signals across the floor in order to place trades. Physical exchanges are made on the trading floor and filter through a floor broker, and they find the trading post specialist for that stock to put through the order. Physical exchanges are still very much human environments, although there are a lot of functions performed by computers. Brokers are paid commissions on the stocks they work. This form of trading has become very rare due to the use of technology.
