The difference between economy and finance

Today we are going to learn what is the difference between economy and finance in our society.
It is a difference that has been thinning lately but which is still present.

We have to start from a well-defined initial assumption, the stock market does not measure the same thing as the economy, they are two connected entities but they represent two separate things.
The financial markets as a whole represent all the stock exchanges in the world and their lists or indices such as the Nasdaq in the United States.

On these indices, stocks, bonds and other financial instruments of that specific country are bought and sold.
The market goes up when the value goes up, and goes down when the value goes down.
So the indices give us an idea of how the market is doing.
If the stock market lists are contained and easily calculated, this is not the case for the economy.
In fact, the economy is much more extensive and difficult to calculate.
A value like GDP ideally indicates a country’s spending mass, but investments, exports, imports, household consumption, their debt burden and government spending must also be considered. We are talking about a huge number of variables.

Back to the stock market, this gives us an idea only of the trend of the companies that are listed on that list.
We are talking about a vision that we can define as distorted or very limited.
These listed companies are actually part of the country’s economy but there are also a lot of companies that are not listed and are themselves part of the economy.
Most companies in a country are not listed, for various reasons.
A possible collapse of the economy would affect them all in a more or less serious way while a collapse of the stock market should not affect them directly, or rather it could affect them indirectly with regard to any listed partners or suppliers.
In fact, if we change our point of view we will see that most of the people who have a job are part of the economy, but not all of these workers have money invested in the stock market, so a decline in stock has no direct impact on the citizen while a collapse of the economy does.
However, it should always be remembered that the stock market is still important since it has an indirect impact on the economy and on citizens’ portfolios. In fact, the value on the stock market is reflected in the banking relationships of companies.
Companies considered of little value on the market, in addition to struggling to survive the competition, cannot access loans and therefore funds for their business.

Returning to the stock market, it should be specified that it may or may not push the real economy.
A rising stock market will give investors a greater propensity to spend, an expense that will be inserted into the real economy circle by increasing wealth. This wealth will allow companies to grow, increasing their staff and their reference markets.
Collect more capital on the market that can be invested in the company itself, without also considering the “wealth effect” given by a rising equity portfolio.
Obviously, all of this is reversed if we have a collapsing stock market, with a slowdown in the real economy.
But this influence between the financial market and the economy is real, the trend of the economy also influences the financial market.
those who work on the stock market base their sales and purchase decisions on what they see happening to the economy and its players in the field.

These two entities are closely linked but not necessarily have to move in the same direction, this is because they focus on two different periods of time.
The financial market has a vision towards the future, those who buy and sell shares do so by thinking about what will happen and how the economy will go in the coming months or years.
So the stock market will grow if there is a belief that the economic world of tomorrow will be better than today.
You can take positions today that will last for years or decades.
The indicators of the economy instead look to the past, that is, they are a snapshot of what it is today, but more precisely yesterday.
Economic indicators can indicate a contraction and at the same time the stock market can grow because investors see a possible recovery of the global economy on the horizon.
Remember that stock market prices reflect investor expectations.
Expectations and not what will happen in the future.
The entities of economics and financial markets are two entities with major complications, which cannot be solved in simple numbers. Always have a balanced approach when investing your money.