The major differences between equity and fixed income markets are the way they make profits for investors, the manner in which they are traded, their representation of financial interest and their levels of risk.
Equity markets involve the purchase and sales of stocks, conducted on regular trading exchanges. All stock markets, no matter the type, can be volatile and experience significant highs and lows in regard to share values.
Operating in equity markets involves taking on substantial amounts of risk in the belief that much greater returns will be obtained. Success with equity investing involves greater amounts of research and follow-up on investments than is required with fixed income investments. Compared with bond portfolios, the holdings of equity portfolios have a substantially higher turnover rate.
Equity investments symbolize interest of ownership in a corporation, while bonds are solely a financial, interest-earning investments.
The fixed-income market, more commonly referred to as the debt securities market or the bond market, consists of bond securities issued by the federal government, corporate bonds, municipal bonds and mortgage debt instruments. The bond market is referred to as a capital market since it provides the capital financing for long-term investments.
Debt security investments are generally seen as less risky than equity investments. As such, they typically offer lower potential returns. Debt security investments are traded over the counter (OTC) instead of being centrally traded on exchanges.
Bonds are the most common form of debt security. Mortgage instruments are also part of this category.
(For further background on fixed income security risk, check out Six Biggest Bond Risks).