Are you looking for financial investment opportunities? Two common choices are either fixed income or equity. Though, if you are at the beginning of your investment journey, it can be quite overwhelming to decide which assets to choose. Financial investment can become a problem with many risks, benefits, and countless calculations.
Of financial assets, there are two major types that might be challenging to choose from. Below, you will find the risks involved and the differences between fixed income and equity.
What is Equity Investment?
Equity investment refers to the money invested in stock shares of companies. As simple as it sounds, the investment in equity measures the value of the company’s assets and its liability.
Investors expect the value of the asset that they bought to rise. Let’s assume you also choose to invest in equity. What does that mean for your portfolio? You invest in a company by purchasing its shares.
The value of the company along with your shares then increases. This means that if you decide to sell your shares or assets, they will then get converted into cash, and you will receive the financial difference in value.
What is a Fixed Income?
Fixed income refers to a “fixed” result of the investment. Investors pay a secured, divided amount on a regular basis. Until when, you may ask?
A fixed income is a secured investment, until the asset is due to its maturity. However, as an investor, you will receive the principal amount that you have invested at its maturity.
Every investment bears its own kind of risk. What are the risks of the two major asset classes of equity and fixed income?
What are the Risks of Equity?
The possible risks of equity include:
- Failure of the company: at the very beginning of the equity risk list, is the failure of the company. If the company that you have invested in fails, the value of your investment will not return.
- Fall of share value: market forces affect the value of your shares. Even though there is a benefit of a rise in share value, there is also as much of a risk in its downfall.
- Inflation risk: if you have invested in a company that might have been hurt by the rising inflation, your investment will then be equally affected.
- Claim to assets: This might sound the same as the ownership, but; the claim of assets refers to bankruptcy. In a case of bankruptcy, debt holders (aka fixed income investors) have priority over equity investors. As equity investors are shareholders, and act like owners.
- Issuers: Corporates offer equity investments, whereas private companies and/or governments offer fixed income investment opportunities.
- Level of risk: Both financial assets have their own risks, as mentioned. What are the levels of risk when comparing fixed income vs equity? Fixed income investments are usually chosen, because of the low level risks. A certain amount of return is promised when investing fixed income, thus the level of the risk is low. When it comes to equity, the level of risk is higher than the fixed income. This is because the return highly depends on assets and their performance, as well as the conditions of the market.
- Both equity and fixed income are both important assets to invest in. While fixed income investments offer a predictable return. Equity offers a possibility of higher results. By considering the level of risks and returns, you can now start your journey as an investor.
So, Fixed Income or Equity?
It is not an easy call to make when it comes to investment. Everybody wants to choose the best way possible to invest their hard earned money. Whether you are looking for an early, comfortable retirement, or looking for a passive income, or maybe even looking forward to learning more about investments for your future, as EWOR team we are here to provide helpful information in this article. The risks and benefits of fixed income vs equity do not look that challenging anymore!