Market credit is a system used on the Spanish stock exchanges to finance stock transactions on the stock exchange.
The market loan grants a maximum financing of 75% of the total investment requirement. That is, the user only has to contribute 25% of the purchase amount.
Characteristics of market credit
Characteristics of market credit include:
- It is financing by securities and stock exchange companies, banks, savings banks, PO Boxes and credit unions.
- Purchase orders must be placed for at least 500 securities of the security to be traded, eg 500 shares in company XY.
- Funding is due on the last business day of the month if the operation was completed between the 1st and 15th of the month. However, if the loan was purchased in the second 14 days, the repayment limit applies on the last business day of the following month. For example, if the credit was purchased on January 10th, it must be returned on January 31st.
- The debtor can twice extend the repayment of the debt by one month each time.
- The financial institution can terminate the contract if the economic conditions are not met, i.e. if the necessary guarantees have not been provided.
- The entity specialized in market lending is RBC DEXIA Investor Services, which is responsible for providing this financing for stock market transactions.
- It is a system regulated by the Ministerial Decree of March 25, 1991, which regulates credit operations on the market.
Market credit example
We can observe an example of buying stocks funded by this system. Let’s assume the user buys 700 titles at 20 euros each. You must contribute 25% of the transaction amount.
The loan granted bears interest of 200 euros for the duration of the operation. In addition, the commissions for buying and selling are 40 euros each.
Then:
- Transaction value: 700 * 20 = 14,000 euros
- Investor contribution: 14,000 * 0.25 = 3,500 euros
- Loan granted: 10,500 euros
If the shares are up 10% at the time the transaction is canceled, the borrower sells them and the following happens:
- Acquisition value of the shares: 14,000 euros
- Sales value of the securities: 700 * 22 = 15,400 euros
- Loan repayment: 10,500 euros
- Difference between sales value and purchase value: 15,400-14,000 = 1,400 euros.
- Commission payment: 40 + 40 = 80 euros
- Interest payment: 200 euros
- Total profit: 1,400-200-80 = 1,120 euros
In other words, the profitability achieved by the operation is 8% (1,120 / 14,000) and 32% if we only take the investor’s contribution (1,120 / 3,500) as a reference. This is due to the leverage of loans.
The above case is a case where we make a profit. However, we must not forget that we can also take losses. Using the previous example, if the stock had fallen 10%, the result would have been exactly the opposite. That means we lost money.
This type of tools is recommended for investors who have advanced knowledge of the stock market.
