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The Basics of Wall Street Explained – Is it a Place for Good?

So, you’re looking to start investing but first you are looking for the basics of Wall Street explained.  What is it?  Why does it exist?  Is it a place for good?

Well, let me first explain what Wall Street even is.  Wall Street is a physical location in lower Manhattan, home of the New York Stock Exchange (NYSE), where daily investing occurs.

Wall Street has also become somewhat of catch all for the stock market/investing related things. 

The Balance wrote a great article that I think really breaks down the very basics of what Wall Street is, and one thing that they focus on is that Wall Street has three key reasons for its existence:

1 – “To establish a market for institutions to raise capital through a centralized trading area that connects savers of capital with those who want to raise capital.”

If you own a business and you want access to more cash for your business, Wall Street helps provide a platform for you to be able to have an Initial Public Offering (IPO) and then offer up shares of your company for more cash.  By doing so, you essentially are getting access to many different investors that you might not have had access to or would’ve needed to work much harder to gain access to.

2 – “To facilitate a secondary market for existing owners of stocks and bonds to find parties willing to buy their securities so they can raise cash.”

Similar to the first point, after the company has hosted their IPO, the shares of the company can then be bought and resold by all investors at will.  For the common person like myself, this is the point where I would be able to buy shares of the company.

I would guess that 99.99%+ of all retail investors will make their stock trades online, but people will refer to that as being on “Wall Street” simply due to that being the origin of how the stock market trading really began.

3 – “To assist those who wish to outsource the job of investing their capital so the client can focus on their primary career or activity.”

Some people will use brokers to invest their money for them so they can focus on other things.  This might be the super successful businessperson, an athlete, an artist, or even someone that works a normal 8-5 and wants to pay Fidelity to manage their 401k for them.

Either way, the accessibility of Wall Street has helped make these brokers have much better access for their clients.

But at the end of the day, this is all and well, but is Wall Street actually a place for good?

I think that a lot of people view Wall Street as a place that’s full of corruption and greed.  They view it as people that are willing to do literally anything that it takes to get ahead, including shoving others out of the way. 

The naysayers will think of companies that have engaged in corruption such as Enron or even most recently, Luckin Coffee. 

They think of the movies that they have seen such as Wolf of Wall Street (which is one of my favorite stock market movies by the way) and The Big Short which focuses on banks lending mortgage money to anyone right before the 2008 housing market crash.

But just as with anything in life, there are a few bad apples that can really spoil a reputation and as always, the bad/corrupt people are always the ones that make the best stories!

Think about with baseball – some baseball players are frauds and use steroids to have amazing seasons, therefore they’re being fraudulent to their fans and their employers about their talent, as well as directly effecting the teams that they’re playing by having an unfair advantage.

Think about Pete Rose – he didn’t even cheat but he bet on baseball games.  Do you know anything else about Pete Rose?  Maybe that he played and coached for the Reds?  I am guessing that’s it.  Because the bad things are what stick out in people’s minds and make for the best stories!

For me to properly address this question, I want to go through the three reasons why Wall Street exists and explain my thoughts on them:

1 Wall Street gives people access to capital for their business that might not have otherwise had it.

To me, I think this is extremely good.  People that have started businesses might be at a point where they’re maybe doing well but they’re really struggling to keep things going because of their cash flow.

Nowadays, a lot of the new up and coming businesses in the world are all going public before they have any sort of earnings, and if they weren’t able to have their IPO, then they might very well never even be able to survive.

I think about companies like ZM, FSLY, and ROKU – all three of which have had major impacts on many people’s lives since COVID-19 has occurred, but likely even prior to then!  These companies all have negative earnings, or have in their recent past, and would’ve likely had some major struggles and not been where they are today without being able to IPO their company and get access to capital.

By these companies getting greater access to capital, not only are they able to provide their products and services to more people, therefore enhancing their lives, but they’re also able to grow faster and employ more people, therefore creating more jobs for people.

I think that providing a way for companies to access capital in exchange for ownership of the company is an amazingly good thing, and not just for the business owners, but for many others that consume the product/service or are employed by that company.

2 – Wall Street gives people the ability to invest in individual companies

Honestly, I think that this reason impacts the majority of people more than any of the three. 

I’ve grown up in a family that always invested but honestly, I thought it was nerdy and boring…and then one day, I realized that I actually found it super interesting.  And maybe that means that I am nerdy and boring…?

The thing that got me invested is that I felt like I was always playing from behind, financially speaking.  I could never get ahead and felt like I was always stressed about money.

That was when I learned about the power of compound interest and how investing can change my life.  Let me explain better:

Let’s pretend that I want to retire in 30 years with $2 million and I have $0 saved right now.  If I was to simply put my money into a high-yield savings account, even assuming a 2% interest rate despite my Ally account being .8% right now, it would take an annual contribution of $48,334 to hit your goal of $2 million in 30 years:

Yuck.  That sounds awful.

But since I am able to invest in the stock market, if I were to assume that I would realize a return similar to the S&P 500 since 1950 of 11%, I could get to $2 million in 30 years simply by only contributing $9,054/year:

Isn’t that insane?  The difference between Wall Street accessibility for the individual investor the difference between having to save $48K or $9K in a year.

To me, that is a huge freaking difference.

Another way to view it is if you were actually able to save/invest $48,334/year, then you would be able to retire at that $2 million goal after 15.62 years rather than 30.

You basically just cut the timing of your goal in half…HALF!

I can honestly say that having the accessibility for me to buy and sell individual stocks has been something that is lifechanging for me.  It’s given me encouragement and excitement to really keep me motivated on my goals.

Personally, l like to invest in individual stocks but you can simply invest in an ETF like VOO for the total stock market return or MTUM if you want to use a Momentum Investing style (which has proven returns better than the S&P 500).

I say this because anyone can invest and it doesn’t take a certain amount of genius for you to be in the stock market.  All that you need to do is get started.  Start with something as simple as this awesome free PDF or some great Twitter accounts and start learning.

The most important thing is time, so get started now if you’re wanting to reach Financial Independence in your future.

The question is – does this accessibility of investing to the normal person mean that Wall Street is a place for good?  Personally, I think this is a resounding yes.

3 – Wall Street allows others the ability to have their money professionally invested by others

This one is also a ‘good’ in my eyes but for the same reasons as I mentioned for #2.  Everything that I wrote above will also apply to this but I do think that there is an additional added benefit that needs to be considered.

The three main types of people that will benefit in this subsection are:

1 – People that don’t have time to invest

2 – People that don’t think they’re smart enough

3 – People that will get in their own way

Personally, the one that I can best relate too is not having time.  If you’re some major big shot at a company that’s making millions of dollars each year then maybe you don’t want to invest and would rather just pay someone to do it.

Personally, I get that.  You’re probably working like 80+ hour weeks as it is so why take the time to invest?  I mean, you could always just invest in ETFs but if you want your own personal touch, maybe you decide to take the route of hiring a financial advisor.

For people that don’t think they’re smart enough – you are wrong.  Investing is as complex as you want it to be.  If you don’t want to get in the weeds, simply buy ETFs!  They can replicate the market or a sector of stocks that you want them to and they take honesty 0 analysis. 

Now, I do think that you should still look at some analytical aspects like what I did when I was looking at Gold ETFs, but it’s all about how much you want to put in.

Personally, I don’t like to invest in ETFs but I will at times.  I have invested in a few where I wanted some exposure to a particular industry without getting too far into the weeds because I didn’t have a comfort in that area, such as JETS for airlines exposure and WCLD for cloud exposure.

It’s all about knowing yourself but trust me, you are smart enough to invest.

And if you’re worried about getting in your own way then I do think that having others invest for you is a good way to help save yourself from yourself.  You need to make sure that you’re not holding your investment advisor to the same standards that you’re trying to protect yourself from because otherwise you’re just going to be paying someone to have the same bad results that you had. 

The main thing is to make sure that your expectations are in line with reality and that you’re not expecting the world. 

Summary

At the end of the day – is Wall Street a place for good? 

I think the answer is a very clear ‘yes’. 

Wall Street helps provide businesses greater accessibility to get capital which they will then use to fund and grow their company.  As their company grows, they will continue to revolutionize and adapt their product/service line, further enhancing the lives of their consumers.  They will then need to hire more people, leading to more jobs and continued innovation providing further development of new types of jobs.

Wall Street provides the average person the ability to achieve financial independence much faster than they could otherwise.  They’re able to finally be able to retire early, or maybe just retire at all, and spend time with their loved ones.  Goals that didn’t use to be available are now within reach.

Wall Street is inclusive of everyone!  Even if you’re not cut out for it, you can have someone invest for you on your behalf.  They can use their expertise to get you closer to financial independence and make sure that you’re on track for your goals.

Of course, there are crooks and criminals that will defraud the system, but for everyone of those people I will show you thousands of people that have achieved lifelong goals that would NEVER have occurred without Wall Street.