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For a smart investor, the stock market offers tremendous opportunities to become wealthier. However, to be a smart investor, you need to be knowledgeable about how market and various instruments work. Wise decisions based on your knowledge and predictions can make you richer with the movements of the market. These wise decisions are similar to availing a casino bonus each time you try your luck in an online casino.
This article explains the basic differences between the equities and fixed income instruments (like bonds) with their relative risk levels.
Equities
Buying equity of a company makes you own a small share in its capital. You gain money when the company makes profits and lose some money when the company loses money. In terms of risk and returns, this involves higher risk of losing money as well as higher chances of good returns on your investments. There is no fixed amount that will be paid to you when you sell the equity you own. Instead, it will be completely based on the NAV (Net Asset Value) of the stock at the point of selling it.
Fixed Income
Buying a fixed income instrument, such as a bond, means that you’re lending some amount to that company. This implies that you will be paid an agreed interest (coupon) over time. These bonds also have a maturity term, and upon completion, you will be paid the amount you invested initially. It involves less risk than equities and, similarly, less returns. You are not likely to lose money until the company files bankruptcy, which is often a rare scenario.
