Difference Between the Stock Market & the Bond Market

by Victoria Duff, Demand Media
    Deciding where to invest your money requires an understanding of the difference between the stock and bond markets.

    Deciding where to invest your money requires an understanding of the difference between the stock and bond markets.

    Deciding whether to invest in stocks or bonds can be confusing. People tell you that the stock and bond markets move in opposite directions, but what that means is not exactly clear. To make matters worse, the stock market is often referred to as the equity market and the bond market is the fixed income market, the debt market, the credit market or the capital market. Part of the bond market is also called the money market. It can all be very confusing.

    Stock Market

    When you buy stock, you are buying a percentage share of the underlying company, so if you own some shares of General Electric, you are a fractional owner of the General Electric company. Common stock represents ownership or equity in a company. The market prices of stocks fluctuate according to each company's financial performance and the outlook for its future performance.

    Bond Market

    When you buy a bond you are loaning money to the underlying company. Ownership of a bond puts you in the position of being a creditor. A bond pays a fixed interest payment every six months, which is why it is called a fixed income investment, and these credit instruments with short maturities under one year are called money market investments. Individual bond prices move according to the credit quality of the underlying company. If the company loses a lot of money and has trouble paying its bills, the bond market will require a higher interest rate return on investment, which means the bond price will decline.

    Interrelationship

    When interest rates are low, companies can inexpensively borrow to finance their operations, so the general stock market rallies in expectation of increased corporate profits. When corporations are posting strong profits because the economy is strong, the stock market is high but the Federal Reserve generally chooses this time to start raising interest rates in order to cool the overheating economy. As interest rates in the bond market rise, the stock market generally declines because corporations have to pay more money to finance their operations and this cuts into their profitability. During times of crisis, the bond market rallies because of a flight to quality in which investors buy bonds to safeguard their principal. During crisis times, investors normally sell their stocks in order to invest in bonds, so the stock market declines.

    Considerations

    If you are seeking safety for your money with a yearly income, the bond market is for you. Most investors in bonds do not trade their investments for profit. The stock market has the image of generating large profits for smart stock traders and tends to fluctuate more widely on a daily basis than the bond market.

    About the Author

    Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.

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