The fundamental differences between the debt and stock markets are the type of financial interest they represent, the way in which they generate a profit for investors, how they are traded and their respective risk levels. Both debt securities and equity investments have the potential to achieve significant returns.
Investments in debt instruments generally entail fewer risks than investing in shares. However, they usually also offer a correspondingly lower potential return on investment. These investments fluctuate less than the stock market between highs and lows, making them less volatile than ordinary shares. Debt investments are not traded centrally, but are traded over-the-counter or OTC. Bonds are the leading form of debt investment, although mortgages also fall under this asset class. Mortgage investments are covered by the underlying real estate as collateral. Historical data shows that both bond and mortgage markets are exposed to much less significant price changes than stocks. Even if a company is liquidated, bondholders are the first to be paid.
Equity investments, buying and selling of shares, are executed on regular trading exchanges. Regardless of the type, all stock markets have the potential to be volatile and experience dramatic fluctuations in stock values. These pragmatic price fluctuations can sometimes have very little to do with the stability and good name of the value of any company they represent; instead, they are caused by social, political, governmental or general economic problems that arise in the country of origin of the company. Equity investments can essentially be seen as taking a greater risk of losing the opportunity to achieve a potentially higher return. Investing in shares, to be successful, requires a substantially higher level of investment research and monitoring. In general there is a much higher turnover rate in the possession of equity portfolios compared to bond portfolios. Equity investments represent an ownership interest in a company, while bonds only represent a financial interest.