When investing the money for growth, two methods are usually preferred by investors, equity securities or fixed income securities. Equity securities are STOCKS whereas the fixed income securities are BONDS.
Equity market involves the sale and purchase of stocks through the trading centres, also called as stock exchange. When you buy equities, means you buy stocks of a particular company. When you buy stock, you become a partner in the company, as you own a percentage of the total value of the company. If the value of the company grows, your investment also grows as the value of the equity grows. People usually buy stocks of a particular company assuming that the company shall perform better in the future and the investment shall grow with the growth of the company. The stocks, also called as shares, can be sold anytime at the market price. The market price of the stock depends upon the market conditions. If there are more buyers for a particular stock, than sellers, the price of the stock shall increase. However, if there are more sellers, the prices shall decrease. Also if the performance of the company is better than the expectations, the share prices soar and give windfall to the investors, whereas if the performance is below expectations, the stock price goes down and the investors are in loss. Companies pays dividends, quarterly, depending upon the profit, the company has made. However, there is no guarantee that the company shall pay dividends to the shareholders.
Fixed income securities involve sale and purchase of bonds through trading agencies. These are also called as debt securities. This is a loan, the company is taking from you at a certain amount of interest and you are getting paid, the interest amount, till the amount is with the company. With the purchase of bond, you do not own a part of the company, but you are given an assurance that your investment in the bond shall give you returns based on mutually agreed term at a fixed rate for a fixed period or lifetime. Once the agreed period, called as maturity period, ends, the company gives you back the “loan” which is the amount you have invested and you have earned interest on the amount you have invested till the maturity period. In this case the income is fixed and is secured.
Both of these involve some amount of risk, but the risk in bonds is typically less and hence the earning is also less. In the case of stocks, the earning varies and is much more than the bonds, but the risk involved is quite high. You may loose your money as well. Whether you should invest in equity or fixed income depends upon the kind of risk you can take and the age at which you are investing. You can invest in stocks if you want to take risk and are investing at an early age. If you want to play safe and are investing at a later age, debt securities are best for you. However, for a balanced portfolio, a mix of both can be considered.