jmherbenerSaving-investing is done to satisfy time preferences. A person gives up present satisfaction for a more valuable future satisfaction. Because people have different intensities of time preferences, those with lower time preferences can save and invest by lending to those with higher time preferences. The rate of interest emerges that clears the time market. Savers, however, have an array of investment opportunities. The main categories are consumer loans, producer loans, and direct investment in production. Bonds would be one type of producer loan while stock would be one type of direct investment in production. The holder of a bond has a claim on predetermined payments of future money from the enterprise. The holder of a share of stock has a proportionate claim on the equity of the enterprise. Investment in bonds earn interest while investment in stock earns interest plus profit (or minus loss).
However, because of uncertainty no matter the investment a person chooses, it is speculative. Thus, people can trade in and out of claims, e.g., bonds or stocks, based on their speculations about the future market values. In secondary markets, bonds and stock are trading from one group of saver-investors to another. The buyers have lower time preferences or higher expectations about future market values or both than sellers. They consider the anticipated return sufficient to compensate for their time preferences. The sellers have higher time preferences or lower expectations about future market values or both than buyers. They consider the anticipated return insufficient to compensate for their time preferences.
Secondary markets facilitate the rearrangement of ownership of claims from those who value them less to those who value them more.