May 05 2020 0
In forex trading, you don’t just trade currency pairs alone. Since this market has got so big, brokers offer many more instruments for traders nowadays. Some common trading instruments you can find at most brokers are equity and debt. So, today’s topic is debt market vs. equity market. Which one should you choose to trade?
What is debt market?
Debt market is a place where traders trade debt instruments, which include things like bonds or mortgages… Debt instruments mean something that you have to pay at a certain point in the future. Most of the time, you have to pay for the interest as well.
What is equity market?
Equity market (most of the time is called the stock market) is a place where traders trade equity instruments, which are stocks. The most famous equity market is the New York Stock Exchange (NYSE).
Characteristics of each market
The most common way for market players to create and supplement capital is to issue a debt instrument such as a bond or mortgage.
Debt instrument is a contractual agreement and the borrower must be obliged to repay the debt instrument holder a certain amount (including principal and interest) at maturity.
Debt instruments are considered to be short-term if their maturity is less than one year, and if from one year or more, they are called medium and long-term debt instruments.
Debt instruments often have a fixed income because the owner is committed to paying fixed amounts in the future. Owners of debt instruments, however, have no right to engage in the issuer's capital use activities.
Companies can raise capital in the equity market through issuing shares.
Other than issuing a debt instrument, a company is only entitled to issue shares when it is a joint stock company.
A stock is considered a security that confirms its ownership of a portion of the property and a share of the company's net income (after deducting expenses and taxes).
Share capital often brings periodic payments to their holders called dividends.
Stock is considered as a long-term security because it has no maturity date and will exist until the business expires or goes bankrupt.
Debt market vs. Equity market: what should you trade?
The answer really depends on what type of trader you are. Debt market fluctuates much less than equity market, and this affects everything. Here are the takeaways:
- Debt market is more suitable for long-term traders, who are comfortable with investing a big amount of money into something and wait for the results in months.
- Equity market is more volatile. Therefore, it is more suitable for scalpers and day traders. Please remember that this market is highly volatile. So the risk of equity market is greater than that of debt market.
- However, greater risk also means greater gains. Debt traders actually make less then equity traders.
- Requirement of knowledge and experience: in our opinion, equity market requires more learnings and trading experience from traders than debt market.
What kind of trader are you? Find the answer now.
Now, when you’re facing a crossroad that has debt market vs. equity market, you know what to choose. Find a market that suit your trading style and strategies. Only then will you succeed.