Let's talk about the market. And liquidity. Two terms that have become "pop", or at least very common. But their meaning remains obscure to most. Sometimes they scare, as when we speak of "market crisis", of "liquidity crisis". Sometimes they are disorienting, as when we read that in our age the market dominates politics.
But to avoid terms dominating the minds and moods of citizens and savers, let's try to get into the gears of supply and demand, or rather the market, to understand how effects on life that affect everyone are determined by this .
What is the market? The market, better to repeat it, is the place where supply and demand meet. The price of the good is agreed, and the exchange takes place. What happens on the street stalls also happens in the financial markets. The mechanism is similar, but instead of having a trader and a buyer, here we have two slightly different subjects.
The financial market it is the place where the needs of those who earn more than they spend and those who invest more than they earn meet. The former are families, the latter are businesses. If a family nucleus manages to put aside a wad of cash, keeping it in the safe would certainly not make it worthwhile. It would remain there, subject to loss in value caused by inflation. Investing it instead would allow profit margins determined by interest rates. But who might be interested in that money?
The subjects in the field: companies and savers. For example, companies that need that money to purchase new machines, materials, etc. Household money is used by them to invest and create value in the economy. If the company grows, its value grows, its revenues increase, a process that concludes the virtuous circle which then allows families to see the investment made return to their portfolios with a good profit margin. Instead of losing value under the mattress, that money also served them as a profit margin. The exchange takes place in what is called the primary market, i.e. the place where new bonds are issued.
What is liquidity? What if the family that invested that money suddenly needs it? A ten-year investment would lock up that money for a long time. How does it come out? This is where the liquidity factor comes in. To function, a market must be liquid, i.e. allow the investor to find someone willing to buy his bond, his investment, divest quickly and obtain cash at a market price. This is where the secondary market comes in, the place where old-issue bonds circulate. The primary market it satisfies the financing needs of a company (but also of a State if one thinks of BTPs).The secondary market satisfies that of liquidity, since it allows a person to liquidate financial assets.
The two markets are closely linked. The price trend of the former determines that of the latter, and vice versa. Not only. A good attractiveness for the investor of the former determines a good attractiveness of the latter. Thus another virtuous circle is created, which guarantees the possibility for the company to find capital and invest, and for families to see their savings bear fruit.
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