Credit investing refers to investing money in the form of credit or loans to companies or individuals, in order to obtain interest income and other credit fees. It is different from equity investing, where investors obtain ownership and voting rights. Creditors have higher security than equity investors, but with lower potential returns. Major types of credit investing include bonds, bank deposits, peer-to-peer lending platforms, etc. Understanding the difference between creditors and investors, as well as creditor rights in bankruptcies, is crucial for assessing risks and returns.
Creditors vs. equity investors
The key difference between creditors and equity investors is on risk-return profile and rights. Creditors lend money and gain fixed interest income, while equity investors invest for potential capital gains but undertake higher risks. In case of bankruptcy, creditors have absolute priority over equity investors on claims. So creditors face lower risks than equity investors. However, creditors do not obtain ownership or voting rights, their returns are also more limited.
Creditor rights in bankruptcies
During corporate bankruptcies, creditor rights follow the absolute priority rule, where senior creditors get paid before junior ones. The priority classes include senior secured creditors, senior unsecured creditors, senior subordinated creditors, subordinated creditors, followed by equity investors. However, empirical studies show violations of absolute priority are common during reorganizations, possibly due to complex negotiations among parties. Overall, understanding creditor rights helps assess credit risks.
Major types of credit investing
Popular asset classes for credit investing include bonds (government/corporate), bank deposits, peer-to-peer lending platforms, etc. Bonds can offer regular coupon payments, while bank deposits provide guaranteed principal + interest. P2P lending generates high yields but with risks on defaults. Investors should compare risk-adjusted returns across different credit products.
Credit investing provides more secure and stable returns than equity investing, by lending money to receive interest income and credit fees. However, potential returns are lower and there are no ownership rights. Major credit investment assets include bonds, deposits, P2P lending. Understanding creditor rights and assessing risks are crucial.