Question

What are the differences between equity and fixed-income securities?

Short answer

Equity is the share of ownership without fixed return guarantee

Fixed income securities refers to the debts with guarantee of a specified return over a specified period of time.

Step-by-step solution

Definition

A share of ownership in a corporation usually without any guarantee of a fixed return is known as equity. In contrast, debts which guarantee a specified return over a specified period of time is known as fixed-income security.

Difference

Difference between equity and fixed-income securities:-

Equity	Fixed-income securities
1. It represents an ownership share in a corporation.	1. Fixed-income security holders are creditors in a corporation or a bond.
2. It does not promise any fixed payment.	2. It promises either a fixed income or a stream of income that is determined according to a specified formula.
3. It is usually issued by corporate.	3. It is also issued as bonds by government and financial institutions, other than corporate.
4. It is paid out in the form of dividends if the firm earns profits.	4. It is paid out as fixed-income irrespective of firm’s financial success.
5. It is highly risky as its dividend is linked to the performance of the firm.	5. It comes in a variety of maturity and payment provisions such as short term bonds, long term bonds and ranges from very safe (in terms of default risk) to relatively risky.