If you are an investor, choosing which financial instrument to trade can be a daunting task. Bonds and equities are two popular investment options that come with their own unique features and risks. While bonds offer a fixed income stream and a lower risk profile, equities provide the potential for capital appreciation and higher returns. Understanding the differences between the two is essential to making informed investment decisions.

In this article, we will explore the key differences between bond and equity trading, helping you to determine which is the right choice for you. If you would like to open an account to start investing in bonds and equities, you can visit Saxo Markets.

What are bonds?

Bonds are debt securities that are issued by corporations, municipalities, or governments to raise capital. When an investor buys a bond, they are essentially lending money to the issuer in exchange for regular interest payments and the return of the principal investment upon maturity.

Why trade bonds?

There are several reasons why people would choose to trade and invest in bonds.

The first one is that they provide a steady and relatively reliable source of income. This is because bonds typically pay out regular interest payments, which can be attractive for investors seeking a consistent income stream.

Another advantage of trading bonds is the relative safety they provide as an investment vehicle. Many investors find them less risky than trading equities, and there is also a return of principal investment upon maturity.

Finally, many bonds are highly liquid, and investors can buy and sell them easily on the secondary market. This makes them accessible and great for those who prefer to be able to liquidate their bonds on short notice.

What are equities?

Equities, also known as stocks or shares, are ownership stakes in a company that represent a claim on the company’s assets and earnings. When you buy a share of stock, you essentially become a part-owner of the company, and you have the potential to benefit from the company’s growth and profitability.

Why trade equities?

There are reasons why equities are one of the most popular investment vehicles.

Firstly, trading equities gives traders the potential for capital gains. If the company you invest in performs well and its stock price increases while you are holding shares, you can sell them for a profit. There are also companies that pay dividends to their shareholders, which can provide a regular source of income for investors.

Another reason people trade equities is because they are typically very liquid, especially blue-chip stocks, which are stocks from large companies with huge market capitalisation and an established trading history. This makes it easy for traders to buy and sell shares easily, as there is always a constant supply and demand of them.

Finally, stock trading is one of the most accessible forms of trading out there. Equity markets are open to individual investors, and stock trading hinges on one simple theory that many traders follow: buy low, sell high. Traders can start trading with a relatively small amount of capital, and there is a large variety of stocks available from different sectors and industries.

What are the key differences between equities and bonds?

Both equities and bonds are financial instruments that are very popular amongst traders in the UK. However, if you are planning on choosing between them, a good place to start is where their differences lie. Below, we examine some of the main differences between equities and bonds:

Ownership

The first difference between equities and bonds is ownership. When you buy a bond, you are essentially lending money to the issuer of the bond. The issuer is typically a company or the government. In return for your loan, you receive regular interest payments and a promise that the principal amount will be repaid when the bond matures. This means that at no point in time do you own any part of the organisation from which you bought the bonds.

On the other hand, when you buy a stock, you become part-owner of the company. This means you have a claim on the company’s assets and earnings. You may receive dividends as part of that ownership, depending on whether the company issues them. You may also receive voting rights and can sit in annual shareholder meetings, depending on the class of your share and company policies.

Risk

The second main difference lies in the level of risk you take when you invest in equities and bonds. When you buy and hold a bond, you generally experience a lower level of risk than when you do equities. This is because bondholders have a priority claim on the assets of the issuer in the event of bankruptcy or default.

On the other hand, equities are subject to more uncertainty and volatility. Their value can fluctuate based on a variety of factors such as company performance, the overall economy, market and industry conditions, the competitor landscape, and investor sentiment. There is no ‘security net’ for equity holders like there is for bondholders.

Return

It is no secret that traders participate in financial markets with the aim of capital gains. Bonds generally offer a fixed rate of return in the form of interest payments, which may be preferable for low-risk traders who prefer to earn a steady and consistent income. When it comes to equities, there is a potential for both capital gains and dividends, and the amount of profit a stock trader can make depends on a variety of factors. This increases the risk level the trader takes, though it may also increase the profit level if things go right.

Liquidity

Bonds can be liquid, but they are generally less liquid than equities, meaning they may be harder to buy and sell quickly. This is because there are typically fewer buyers and sellers in the bond market, and the market may be less transparent. The stock market, however, is one of the largest financial markets in the world, and there is rarely a deficit of buyers and sellers. For some major stocks, one can very easily find buyers and sellers anytime the market is open.

Purpose

The final key difference between stocks and bonds is their purpose. Bonds are used by companies, the government, or other organisations to raise capital for specific projects or initiatives. Equities, on the other hand, are used to raise capital for general business purposes. These include expansion, acquisitions, and development.

The bottom line

Overall, both equities and bonds are popular instruments and there are traders who like to invest in both as a means of portfolio diversification. If you are a trader who prefers a lower-risk and stabler investment, you may prefer investing in bonds. Conversely, if you are a trader who likes to take risks and aim for the potential to make bigger gains, equities may be good for you.

At the end of the day, it is important to remember that you should take risk management measures and do thorough research regardless of the instrument you choose to trade. This is because all forms of investing involve risk, and there is never a guarantee of profits.