What Makes Equity Markets Different From Debt Markets?

 

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    Scott Tominaga notes that one of the most important functions of a company is raising capital. As he points out, there are, broadly speaking, two main ways a company can finance its operations: taking on debt or issuing equity. While debt entails borrowing a fixed amount with an agreement to repay it with interest over time, issuing new equity entails selling an additional ownership stake to another person or entity.

 As Scott Tominaga further explains in this article, the equity and debt markets operate in two distinct ways.

The distinction

The stock market is the venue for buying and selling stocks and pertains to several well-known marketplaces such as Nasdaq, the London Stock Exchange, and the New York Stock Exchange, to name a few. Though stocks were originally bought and sold in person on a trading room floor, now almost all of these transactions occur via computers.

 

Meanwhile, Scott Tominaga explains that the debt or bond market is the arena for investing in fixed income assets. It is worth noting that there isn't a single physical exchange for bonds since most of these transactions are made by individual investors or between large institutions and brokers.

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Clearing up confusion

The distinction between debt and equity and their associated markets must be made at the onset, as most beginners in the industry often have to deal with the confusion of whether debt financing or equity financing is more suitable for their situation.

 

To sum it up, investors and traders in the debt market buy and sell bonds, while those in the equity market buy and sell shares of stock.

 

What are your thoughts on debt markets and equity markets? Do you prefer one over the other? Do you have any tips on navigating these markets? If so, do share them with Scott Tominaga in the comments section below.

 

Scott Tominaga is a seasoned professional in the financial services and hedge fund industry. He has written several blogs and articles on a broad range of topics. Click this link to read past articles from Scott Tominaga.