Last Updated on October 16, 2023 by BFSLTeam BFSLTeam
Investors in India have a plethora of investment avenues and options to choose from. While this range of choices can be beneficial in many ways, it can also become overwhelming if you are a beginner who is not quite well-versed in the markets. More specifically, you may be confused about choosing between stock and bond — each of which has its own unique advantages and features.
If you are in a dilemma about making a decision between the stock markets and the bond markets, the first step to resolving it is a deeper understanding of the two segments. In this article, you’ll find all the answers you’re looking for about the difference between stocks and bonds, the details of the stock and bond markets and more.
Table of Content
What is the Difference Between Stocks and Bonds?
Stocks and bonds are both financial securities that you can trade in. However, beyond this broad similarity, there are many differences between the two asset classes.
Stocks, also known as shares, represent units of ownership in a company. They can be purchased in the primary market when a company carries out an Initial Public Offering (IPO) or in the secondary market, where shares are freely traded on stock exchanges. The returns from stocks can be in the form of dividends (which are portions of the company’s profits), or via capital appreciation over the long term.
Bonds, on the other hand, are debt securities. They are issued by the central government or various state governments. In essence, they are loans from the investor to the issuing entity. In return, investors receive interest payments during the tenure of the bond. The par value of the bond is repaid at maturity.
Here’s a tabular summary of the main differences between stocks and bonds.
| Particulars | Stocks | Bonds |
| Meaning | Ownership stake in a company | Debt instruments issued by different entities to raise capital |
| Nature of Investors | Shareholders are part-owners of the company | Bond holders are creditors of the company and not its owners |
| Returns | Stocks offer returns in the form of dividends and/or capital appreciation | Bonds offer returns in the form of annual coupon payments and the par value paid at maturity |
| Risk | Generally considered to be riskier than bonds | Typically carry lower risk than stocks, but the risk varies depending on the creditworthiness of the issuer |
| Duration of Holding | Indefinite and no limit, as long as the company remains publicly listed | Till the maturity date (except in the case of perpetual bonds) |
| Trading Channels | Traded on stock exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) | Can be traded on exchanges like the NSE and the BSE or even bought and sold in the over-the-counter (OTC) market |
| Stability of Income | Dividends are not predetermined or guaranteed | Coupon payments are known upfront |
| Voting Rights | Common shareholders have voting rights in the company | Bond holders do not have any voting rights in the company or the issuing entity |
| Priority in the Case of Liquidation | Shareholders are the last priority when it comes to receiving payments in case the company goes into liquidation | Bond holders are prioritised over shareholders since they are creditors of the company |
| Taxation | Gains are categorised as long-term capital gains (LTCG) or short-term capital gains (STCG) and taxed accordingly, and dividends are taxed as a part of the regular income | Gains are categorised as LTCG or STCG and taxed accordingly, while coupon payments are taxed as a part of the regular income |
| Tax Benefits | No direct tax benefits from equity shares | Tax-free bonds offer coupon payments that are exempt from tax, while tax-saving bonds offer tax deductions u/s 80CCF of the Income Tax Act, 1961 |
What is the Stock Market?
The stock market is that segment of the financial market where shares of companies are bought and sold. It is divided into the primary market, where stocks are issued to the public for the first time via an IPO, and the secondary market, where stocks are freely traded between existing investors and interested buyers.
What is the Bond Market?
The bond market is that segment of the financial market where debt instruments like bonds are traded. In the primary bond market, investors can directly purchase new bonds from the government or the corporate entity that is issuing the bond. In the secondary market, bonds are traded on exchanges or in the OTC segment.
The Difference Between the Stock Market and the Bond Market
Both the bond market and the stock market may be segments of the financial market, but they are different in many ways. Right from the type of instruments traded and the regulatory authorities to the liquidity, risks, volatility and more, the two market segments are not very similar.
Now that you have a fair idea of the meaning of these markets, let’s take a closer look at what the difference between the stock and bond market is.
| Particulars | Stock Market | Bond Market |
| Definition | This is the marketplace for selling and buying units of ownership in listed companies | This is the marketplace for selling and buying debt instruments issued by governments and corporate entities |
| Major Exchanges | Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) | Wholesale Debt Market (WDM) segment of the NSE, the BSE’s bond platform and over-the-counter (OTC) markets |
| Market Participants | Retail investors, mutual funds, domestic institutional investors and foreign institutional investors (FIIs) | Retail investors, domestic institutional investors, banks, FIIs, mutual funds etc. |
| Instruments Traded | Equity shares and equity derivatives | Government bonds, corporate bonds, municipal bonds, Sovereign Gold Bonds (SGBs) |
| Trading Volume | Higher trading volume due to a greater number of market participants and high frequency trading | Lower trading volume since many bonds are typically held till maturity |
| Liquidity | Higher liquidity due to more trading activity | Lower liquidity than stocks, but it varies from one type of bond to another |
| Transparency | A high degree of transparency with real-time price discovery | Transparency may be lower in OTC transactions |
| Regulatory Body | Securities and Exchange Board of India (SEBI) | Securities and Exchange Board of India (SEBI) for corporate bonds and the Reserve Bank of India (RBI) for government bonds |
| Risks | Market risk, company-specific risks and geopolitical risks | Interest rate risk, credit/default risk and reinvestment risk |
| Key Performance Indicators (KPIs) | Stock indices | Metrics like credit rating, yield to maturity, etc. |
Bond Market vs. Stock Market: Which Should You Invest In?
The bond market and stock market offer diverse investment opportunities. While stocks represent ownership in a company and the potential for higher returns, they come with greater volatility. Bonds, being debt instruments, offer predictable interest payments and are generally considered lower risk, but may provide lower returns. Your choice between them should be based on your financial goals, risk tolerance, and investment horizon. Diversifying across both can help achieve a balanced portfolio.
Conclusion
Now that you know the key differences between the stock market and the bond market, you can make a more informed choice about which segment you wish to participate in. Despite their differences, both these markets are well-regulated in India. To get the best of both worlds, you can invest in both stocks and bonds.
The asset allocation will depend on your risk profile. If you are risk-averse, you can limit your exposure to the stock market. On the other hand, if you are capable of taking on more investment risk, you can have an equity-heavy portfolio while still tapping into the benefits of the bond market.
