Bond Market vs Stock Market: A Guide

A stock market is a place where investors go to trade equity securities (i.e. shares) issued by corporations. The bond market is where investors go to buy and sell debt securities issued by corporations or governments

• A stock market is a place where investors go to trade equity securities (i.e. shares) issued by corporations.
• The bond market is where investors go to buy and sell debt securities issued by corporations or governments.
• Stocks typically trade on various exchanges, while bonds are mainly sold over the counter rather than in a centralized location.
• In the United States, the prominent stock exchanges include Nasdaq and the New York Stock Exchange (NYSE).

Key Differences

One major difference between the bond and stock markets is that the stock market has central places or exchanges where stocks are bought and sold.

The other key difference between the stock and bond market is the risk involved in investing in each. When it comes to stocks, investors may be exposed to risks such as country or geopolitical risk (based on where a company does business or is based), currency risk, liquidity risk, or even interest rate risks, which can affect a company’s debt, the cash it has on hand, and its bottom line.

Bonds, on the other hand, are more susceptible to risks such as inflation and interest rates. When interest rates rise, bond prices tend to fall. If interest rates are high and you need to sell your bond before it matures, you may end up getting less than the purchase price. If you buy a bond from a company that isn’t financially sound, you’re opening yourself up to credit risk. In a case like this, the bond issuer isn’t able to make the interest payments, leaving itself open to default.

Stock market performance can broadly be gauged using indexes such as the S&P 500 or Dow Jones Industrial Average. Similarly, bond indices like the Barclays Capital Aggregate Bond Index can help investors track the performance of bond portfolios.