Differences between debt market and capital market

In the world of finance there are two markets to which both companies and the government approach in order to find financing and use that money for the different projects they have planned to continue growing and consequently boost the economic engine of the country. These are the debt and capital markets. They issue the instruments through which companies and the government are financed.

On the other side of the equation are investors, people or institutions whose surpluses can be used to provide financing to other companies or governments in exchange for being able to obtain an attractive return. The instruments through which these surpluses are transferred are mainly bonds and shares.

In the debt market there are bonds, cetes, certificates of deposit, among others, as the main instruments. Said instruments turn investors into creditors, who have the right to receive a series of flows called interest on a regular basis and stipulated at the time of their creation, and oblige debtors (companies or other institutions) to pay interest and of its face value at maturity. Another characteristic of debt instruments is that they are considered less risky compared to shares in the same company because the latter is obliged to pay the debt before remuneration to the holders of shares in the event of bankruptcy.

One of the factors that must be taken into account when investing in debt securities is the debtor’s ability to pay and to find out, there are credit rating agencies that are constantly evaluating that ability and issue their opinion about the facility they have for make payments. Most companies that issue debt do so in search of liquidity and not to finance large projects that require intensive capital. What they seek is to cover short-term operating or working capital expenses that are incurred in a period of about a year or less.

In the capital market, companies issue capital through shares and these instruments can be acquired by the investing public. Stocks are considered riskier instruments, since fluctuations in the capital market can become larger and, therefore, prices can change quickly and abruptly. This is why capital markets are often considered for long-term investments.

Unlike the debt market, in the capital market the holders of shares become shareholders and thus become “partners” of the company. There are different types of shares which grant different kinds of rights to their shareholders. Some grant the right to receive dividends, while others may grant the right to vote on relevant decisions in participating companies.

Both markets form the foundations of the stock exchanges, organizations that provide companies with the facility to seek and find financing and that give investors the opportunity to use their surpluses to build an investment portfolio. These portfolios must be completely adapted to the profile of each investor, taking into account the level of risk aversion that they have and the period stipulated to be able to make use of their investment.

*David Arrieta Chávez es Front Manager Investment LATAM – BBVA Asset Management.

david.arrieta@bbva.com