The term 'Fixed Income Markets' is included in the Corporate Finance edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Choose your edition here...
The Fixed Income Market refers to the bond market. This market is actually over twice the size of the better known (and more popular with investors) equity stock markets. The truth remains that it is mostly less well publicized by the media or followed and comprehended by the overall investing public. In fact equities differ from fixed income in many ways.
Trading is the first and most important difference. There are countless more securities available on the fixed income market. For example, GE stock is a single issue. GE bonds offer literally thousands of different GE securities from which to choose and in which to invest. As another real world example, in the Federal Government Treasuries markets, investors possess literally hundreds of different offerings.
The upside to having such a wide-ranging variety of debt issues from which to choose lies in the fact that investors are able to select a particular security which nearly identically meets all of their varying needs. There is also a flip side to this in that investors must develop an effective procedure for distilling all of their needs down to an exact formula so that they can next carefully screen through the fixed income industry to choose the security which most perfectly aligns with said requirements.
Price transparency is the second significant difference between equities and fixed income markets. The pricing on stocks are instantly relayed to both participants and countless media outlets. This means that investors have a high degree of confidence in their ability to obtain a fair market price for the purchase when they are ready to invest. With the bond markets, the trades become executed on the basis of dealer to investor or dealer to dealer.
With no central record for all the various transaction prices across the fixed income markets, the prices can and do differ substantially from one trade to the next. It also means that some particular bond issues might not actually trade over days, weeks, or months since the enormous volume of individual issues affects the volume per issue.
The problem to all of this is that investors can never have any concrete certainty on what an individual bond’s fair market price really is. This brings up the second major difference between equity and fixed income markets. Institutional investors are the overwhelmingly dominant and critical players in the bonds market, though they are also important in equities markets as well. This is simply because retail investors are commonly far more active in the equities markets than they ever would be in the bond markets. Another factor that discourages the smaller retail investors from the fixed income markets is that the bond markets exact penalties on smaller sized trades.
In fact the institutions nearly completely dominate the bonds’ markets. This makes the typical sized trade enormous, even in the millions of dollars in bonds. Any investors who tried to take on less than a million worth of them would pay a penalty in the pricing on the issue.
Yet there are a few advantages that smaller individual investors do possess in the bond markets. First among these is that the longer term investors do not have to worry over the noise of the daily price movements in the markets. This means that the individual investors can look for appealing longer-term opportunities and not have to worry about intervening price fluctuations along the way till maturity.
Individual investors can also contemplate a bigger variety of issues than most institutions. This is because the institutional investors are often strictly limited by their own investment rules and policies which state what kinds of issues they may or may not purchase and hold.
Finally, individuals have the ability to quickly move in and out of issues as their valuations deteriorate. Managers of bond mutual funds and other large institutional holdings do not have such options. They must instead simply buy the bonds when the money comes in or out of their underlying fund.