A credit market is that financial market in which the participants, who are companies, governments and individuals, exchange instruments of debt Long and short term.
In this way, we can say that it is a market in which those who intervene lend or borrow money. We must bear in mind that in this case we do not refer to the market of Actions, since these are investments and not loans. Therefore, we are talking about obligations of companies or states. These issue them and in turn, companies and individuals buy them to finance them.
Types of credit market
The classifications of these types of markets, similar to those of the stock market, are varied, but could be grouped into the following two:
- Depending on the type of financial assets That are exchanged. In this case we have the monetary or short-term markets, with high liquidity assets; and those of medium and long-term capital, with assets that finance investments with periods of time of several years.
- Because of its structure. The first would be organized markets, where buyers and sellers act according to certain established standards. On the other hand, there would be the unorganized, where there are no such rules, although there are a number of customs of use.
Credit and stock market difference
A common confusion occurs between the credit market or fixed income, where short and long term debt or equity is exchanged, where shares are bought and sold. In the first one, money is lent to companies and states, therefore, there is a lender and a borrower. The second is related to the net worth of the companies, since what we acquire is a proportional part of this, for that reason, there are investors in it.
The error usually occurs especially in organized markets such as stock exchanges, since they operate with both types of financial assets, fixed income and equities. In the first one a interest which is usually fixed and in the second a profitability based on the benefit (dividend) which is variable.
Credit Market Example
To make clear what a credit market is, nothing better than some examples of each of the categories:
- Stock exchanges in different countries are an example of a long and short term structured market. In them, the two types of assets (fixed and variable income) are usually operated and are done with a series of pre-established norms. The fixed income market is therefore a credit market.
- An example of an unstructured market would be one in which companies and lenders agree that the latter finance the former. In these cases there is no regulated market as such and the conditions are set by both parties by mutual agreement, without the intervention of an independent institution to both.
- A long-term market would be the issuance of corporate or state obligations. Provided that these assets have a maturity of more than one year.
- A short-term credit market could be the purchase sale of company promissory notes. They are normally issued within a year.