WHAT IS WALL STREET?
Wall Street is a street located in lower Manhattan in New York City and is home to the New York Stock Exchange, or NYSE. Wall Street has also been the historic home to some of the largest stockbrokers and investment banks in the U.S.
UNDERSTANDING WALL STREET
Today, the term Wall Street is used as a collective name for the investment and financial community, which includes stock exchanges, large banks, brokerages, securities, and underwriting firms. Today, brokerages are located in various locations and provide access to the same information available to Wall Street moguls.
Wall Street got its name from the wooden wall that Dutch settlers built in lower Manhattan in 1653 to defend themselves against the British and Native Americans. The wall was torn down in 1699, but the name stuck.
The Wall Street area became a center of commerce in the 1700s, but it did not become famous as the financial center of the United States until 1792, when 24 of the first and most prominent brokers in the United States signed the agreement. of Buttonwood. The agreement describes the common form of commission-based securities trading. Some of the first securities traded were war bonds, as well as bank stocks such as First Bank of the United States, Bank of New York, and Bank of North America.
This (Today) great world business center did not become famous as America’s financial center until the Buttonwood Accord was signed, which eventually formed the New York Stock Exchange Board. Today, the NYSE is still at 11 Wall Street.
The signing of the Buttonwood agreement that gave rise to the stock market on Wall Street
The NYSE came later. In 1817, the Buttonwood settlement was revised, which got its name because it occurred under a Buttonwood tree. The brokerage organization was renamed the New York Securities and Exchange Board. The organization rented space to trade securities, in various locations, until 1865 when it found its current location at 11 Wall Street.
After World War I, Wall Street and New York surpassed London by becoming the most important financial center in the world. Today, The Street is still home to several major financial institutions. The New York Stock Exchange is still on Wall Street, as is the United States Stock Exchange, and several banks and brokerages.
WALL STREET VS MAIN STREET
While Wall Street often refers to the global finance and investment community, it is often compared and contrasted with Main Street. The term Main Street is often used as a metaphor for individual investors, small businesses, employees, and the economy in general. Main Street is a common name for the main street in a city where most of the local businesses are located.
There is often a perceived conflict between the goals, desires, and motivations of Main Street and Wall Street. The Street tends to represent large businesses and financial institutions, while Main Street represents small and family-owned stores and small businesses.
SPECIAL CONSIDERATIONS
Today, Wall Street is used as an umbrella term to describe financial markets and publicly traded companies in the U.S. Although Wall Street is an important place where various financial institutions are based, the globalization of finance has led to many financial institutions are being established around the world.
Wall Street is often abbreviated as “Street,” which is how the term is frequently used by those in the financial world and in the media. For example, when reporting a company’s earnings, an analyst could compare a company’s earnings to what Street expected. In this case, the analyst compares the company’s earnings with what financial analysts and investment firms expected for that period.
WHY WALL STREET HAS SO MUCH IMPACT
The United States is the largest economy in the world by nominal GDP, with a gross domestic product (GDP) as of 2019 of 21.4 trillion dollars (millions of millions of dollars), which comprises 24.8% of world economic output. It is one and a half times the size of the second-largest economy, China (with a GDP as of 2019 of 14.14 trillion). In terms of market capitalization, the United States is the largest in the world by some distance, accounting for 40% of the global market capitalization. (as of August 2018). The Japan market is a distant second, with just over 7.5% of the global market capitalization.
Wall Street has such a significant impact on the global economy because it is the commercial center of the largest financial markets in the richest nation in the world. Wall Street is home to the venerable New York Stock Exchange, which is the undisputed world leader in terms of average daily stock trading volume and total market capitalization of its listed companies. The Nasdaq Stock Exchange, the second-largest exchange in the world, is also based on Wall Street.
HOW DOES WALL STREET HAVE SUCH AN IMPACT?
Wall Street affects the U.S. economy in several ways, the most important of which are:
Wealth effect: Buoyant stock markets induce a “wealth effect” on consumers, although some prominent economists claim that this is more pronounced during a housing boom than during a bull equity market. But it seems logical that consumers are more inclined to splurge on high-priced items when equity markets are hot and their portfolios have racked up considerable profits.
Consumer Confidence – Bull markets generally exist when economic conditions are conducive to growth and consumers and businesses are confident about the prospects for the future. When your confidence is high, consumers tend to spend more, which boosts the US economy, as consumer spending accounts for about 70% of the entire economy.
Business Investing – During bull markets, companies can use their expensive stocks to raise capital, which can then be deployed to acquire assets or competitors. Increased business investment leads to higher economic production and creates more employment.
RELATIONSHIP WITH THE ECONOMY
The stock market and the economy have a symbiotic relationship, and during good times, one leads the other in a positive feedback loop. But in times of uncertainty, the interdependence of the stock market and the broader economy can have a very negative effect. A substantial recession in the stock market is considered a harbinger of a recession, but this is by no means a foolproof indicator.
For example, the Wall Street crash of 1929 led to the Great Depression of the 1930s, but the 1987 crash did not cause a recession. This inconsistency led Nobel laureate Paul Samuelson to comment that the stock market had predicted nine of the last five recessions.
Wall Street drives the U.S. stock market, which in turn is a benchmark for the global economy. The global recessions of 2000-02 and 2008-09 originated in the United States, with the bursting of the tech bubble and the housing collapse, respectively. But Wall Street can also be the catalyst for global expansion, as is evident from two examples in the current millennium. The 2003-07 global economic expansion began with a large Wall Street rally in March 2003. Six years later, amid the biggest recession since the 1930s depression, the rise of the economic abyss began with a massive Wall Street rally. in March 2009.
WHY WALL STREET REACTS TO ECONOMIC INDICATORS
The prices of stocks and other financial assets are based on current information, which is used to make certain assumptions about the future that in turn form the basis for estimating the fair value of an asset. When an economic indicator is released, it would generally have little impact on Wall Street if it falls according to expectations (or what is called the “consensus forecast” or “average analyst estimate”). But if the indicator comes in much better than expected, it could have a positive impact on the Street market; conversely, if it is worse than expected, it would have a negative impact on Wall Street. This positive or negative impact can be measured by changes in equity indices, such as the Dow Jones Industrial Average or the S&P 500., for instance.
For example, suppose that the US economy is moving slowly and that payroll numbers to be released on the first Friday of next month are expected to show that the economy created 250,000 jobs. But when the payroll report is released, it shows that the economy only created 100,000 jobs. Although a data point does not trend, weak payroll numbers may lead some economists and market watchers on Wall Street to rethink their assumptions about future US economic growth. Some Wall Street companies may lower their forecasts for US growth, and strategists at these companies may also lower their targets for the S&P 500. Large institutional investors who are clients of these Wall Street companies may choose to abandon some buy positions on the stock market upon receiving their reduced forecasts. This cascade of sales on Wall Street can result in equity indices closing significantly lower on the day.
WHY WALL STREET REACTS TO COMPANY RESULTS
Trading Operators on the NYSE Wall Street Stock Market
Most medium and large companies are covered by various research analysts employed by Wall Street companies. These analysts have in-depth knowledge of the companies they cover and are sought out by buy-side institutional investors (pension funds, mutual funds, etc.) for analysis and information. Part of the analysts’ research efforts is dedicated to developing financial models of the companies they hedge and using these models to generate quarterly (and annual) forecasts of revenue and earnings per share for each company. The average of analysts’ quarterly earnings and earnings per share (EPS) forecasts for a specific company is called“Street estimate” or “Street expectations. “
Therefore, when a company reports its quarterly results if its reported revenue and earnings per share numbers match Street’s estimate, the company is said to have met Street’s estimates or expectations. But if the company exceeds or loses Street’s expectations, the reaction in its share price can be substantial. A company that exceeds Street’s expectations will generally see its share price rise, and one that disappoints may see its share price drop sharply.
WHAT IS THE ROLE OF WALL STREET?
Wall Street, both the physical place and its metonymy (The rhetorical figure that describes the financial markets of the United States), exists for three key purposes:
1. To establish a market for institutions that want to receive capital through a central trading area that connects capital savings (Investors) with those who want to receive capital (Companies). Wall Street trading can come in multiple ways. These forms of trading include, but are not limited to, bonds or the sale of a fraction of a business property through stocks. Wall Street makes capitalism work – supported by government regulations – by efficiently moving money to its most productive uses.
In essence, if a company with great growth prospects for expansion requires capital, it can go to the public stock market on Wall Street and offer part of the ownership of its business in exchange for capital. Generally, companies that reach the Wall Street public market have already traveled a broad path of growth and regulations, so they are very solid companies and offer extremely interesting growth prospects.
2. To facilitate a secondary market for holders of stocks and bonds looking to find third parties willing to buy their assets so that the former can have immediate cash. This makes the markets more successful, to the extent that investors have the assurance and confidence that they can use their portfolio as a source of liquidity. As a result, investment risks are reduced and investors can have their capital available at any time they need it. For example, since shares in a company are always being bought and sold, an investor who has bought shares of Apple or Nvidia on a given day can sell the shares just the next day, or on the same day, of the purchase, if presents you with an unforeseen situation that causes you to require capital immediately.
3. To assist those who wish to outsource the work of investing their capital so that investors can focus on their primary career or primary source of income.
This outsourcing of investment is often done through market operators or traders. Increasingly it is done through registered investment advisers who are tied to specialized firms and whose policy is to put the interests of investor clients above their own. On the other hand, if you are a highly successful high-income individual, you can pay someone else to manage your investment portfolio. In this way you can focus on making more money through your work, without having to constantly research which are the best companies to invest in, all this when you leave your money to the collection of mutual investment funds or specialized fund managers.
Of interest: Wall Street is like a repository for investments that are presented in a wide variety of types of market assets, mainly the stock market.
When people think of Wall Street, they generally have the secondary stock market in mind. This is the buying and selling of existing shares of outstanding assets that are sold by individual investors through their brokerage and retirement accounts. Each of these buying and selling actions is reflected in the movements of the largest indices in the market, such as the Nasdaq100, the Dow Jones Industrial Average and the S & P500.
HOW DOES WALL STREET TRADING WORK?
Trading in all types of markets – including the stock and bond markets that comprise what is done on Wall Street – involves a whole host of factors that affect prices. You can find market makers that are central to all platforms or exchanges. These market makers, also known as broker-dealers, are integrated into the trading system of the exchanges to facilitate the flow of money and the buying and selling operations.
Typical Wall Street exchanges are the New York Stock Exchange and the Nasdaq Stock Exchange, where the shares of the main companies in the American market are traded.
Most investors believe that the prices of traded assets are based on factors such as changes in company management, news and events, and corporate actions, that is, the decisions of company executives. What most investors don’t realize is that market makers and the supply and demand for a given asset in the market on a given day can also have a very large impact on the prices of stocks and bonds. . In short, beyond the fundamental factors such as decisions that affect the future of a company, technical elements such as the movement of investors (profit-taking, or fear due to a sudden market crash,
Market makers exist or appear in various forms. These range from individuals trading on the floors of the New York Stock Exchange and Nasdaq to electronic communications networks. Each transaction in exchange needs a party that is willing to take the opposite side in a certain operation. That is, for each purchase operation a respective sale operation is needed, the same is true in the opposite sense. Market makers work as intermediaries and earn a small commission or fee for their services in the process.
WAYS TO PARTICIPATE IN THE WALL STREET MARKET
BlackRock is one of the most important institutions involved in Wall Street trading.
Currently, there are various methods to participate in the Wall Street market, either by buying stocks and bonds, as well as taking short positions on the same assets. Among the most common ways to participate in the market are brokers, which can be accessed by retail investors to buy and sell assets. Some of these brokers are Robinhood Markets, eToro, Easy Markets, Interactive Brokers, Charles Schwab, among others. Another way to participate in the market is capital management companies that can be accessed by institutional investors, pension funds, large companies, among other actors. Some of these companies are: BlackRock, Vanguard, State Street Advisors, Fidelity Investments and JP Morgan Asset Management. Each of these companies aims to develop investment products that offer the best financial results in accordance with the financial objectives of their clients. For this work, capital management companies charge a commission that is equivalent to a percentage of the capital invested in annual terms. These commissions usually range between 1 and 2% per year.
CRITICISM OF WALL STREET
Some criticisms of include:
It is a fraudulent market: Although the Street operates fairly and on an equal footing most of the time, the convictions of Galleon Group co-founder Raj Rajaratnam and various SAC equity advisers on insider trading charges reinforce the perception that they have areas where the market is rigged.
Encourages Biased Risk Taking: The Wall Street business model encourages biased risk-taking, as traders can make windfall profits if their leverages are right, but they don’t have to bear the huge losses that would result if they were wrong. Excessive risk-taking is believed to have contributed to the 2008-09 mortgage-backed securities crisis.
Street derivatives are weapons of mass destruction: Warren Buffett warned in 2002 that derivatives developed by Wall Street were financial weapons of mass destruction, and this proved to be the case during America’s housing collapse when mortgage-backed securities went into free fall.
Wall Street can bring the economy to its knees: as discussed above and as seen in the Great Recession of 2008-09.
Too Big To Fail Bailouts Need Taxpayer Funds: Wall Street giant banks and companies that are deemed “Too Big to Fail” would need taxpayer funds if they need a bailout.
Your Main Street Disconnect: Many see the Street Financial Center as a place where unnecessary intermediaries abound, who are highly paid despite not generating value to the real economy as Main Street does.
Wall Street arouses envy in some and anger in many: The million-dollar payments that are quite common on Wall Street cause envy in some and anger in many others, especially after the recession of 2008-09. For example, “Occupy Wall Street” stated in its manifesto that it “is fighting the corrosive power of major banks and multinational corporations over the democratic process, and the role of Wall Street in creating an economic collapse that has caused the greatest recession in generations ”.
FINANCIAL POPULISM AGAINST WALL STREET
On January 28, 2021, it became known that a group of retail investors, basically young commentators on a forum on the Reddit website, bet massively against the large Wall Street hedge funds, causing them to lose millions of dollars in operations that lasted a few days via retail investment platforms like RobinHood.
The Reddit group or forum known as WallStreetBets, with no less than three million subscribers, advanced its bets against hedge funds, instructing small investors to buy shares of a physical game store called GameStop. The move caused the company’s shares to rise very quickly and caused unexpected losses for hedge fund investors who had bet on short trades against the company. After it became known that the rise in GameStop stock prices was due to a coordinated purchase by activist investors from Reddit, several retail trading platforms such as Robinhood Markets canceled or temporarily prohibited the purchases and sales of shares of Gamestop.
The movement of these activist investors sparked a debate on the extent to which Wall Street and its investment systems benefit a few investors and how these same investors react when their interests are attacked by ordinary citizens, since after the shake of the prices of GameStop, several hedge fund investors called on the control authorities, such as the SEC, to further regulate the financial markets to avoid this type of collusion.
CONCLUSION
Wall Street is made up of the largest stock exchanges in the United States, the largest financial companies in the world, and employs thousands of people. As the commercial center of the world’s largest economy, Wall Street has a lasting impact not only on the American economy but also globally.
