Learn How Wall Street Works

The New York Stock Exchange
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Cultura Travel / WALTER ZERLA / Getty Images

The term "Wall Street" has come to mean two things in the modern language of finance. It's a place where trading occurs, and a metonymy (figure of speech) for any of the capital markets.

Two Meanings of Wall Street

Wall Street is is the name of a street in lower Manhattan that is home to the New York Stock Exchange and financial institutions that have been around for centuries. You can go to Wall Street and stand amidst offices that control trillions of dollars in wealth.

Wall Street is a figure of speech for capital market finance. The term is often used to describe a person, institution, or activity tied to high finance and banking.

For example, American Century Investments is an asset management company in Kansas City, Mo., that oversees $170 billion. That is mostly through mutual funds and institutional relationships. American Century is in the heart of the Midwest. Miles of plains lie just a few miles from its headquarters at the Country Club Plaza. It is nowhere near the physical Wall Street, but it is very much a part of what people think of when they discuss the activity of portfolio managers, retirement plan administrators, and such.

What Is the Role of Wall Street?

Wall Street, both the physical place and the metonymy, exists for three key purposes:

1. To establish a market for institutions to raise capital through a central trading area that connects savers of capital with those who want to raise capital. Wall Street trading can come in many forms. This includes, but is not limited to, the issue of bonds or the sale of ownership in a business through the issue of stocks. Wall Street makes capitalism work—with the support of government regulations—by moving money efficiently to its most productive uses.

2. To facilitate a secondary market for owners of stocks and bonds to find parties willing to buy their securities so they can raise cash. This makes markets more successful, as investors have more confidence in the ability to use their portfolio as a source of liquidity. As a result, lower risk premiums are usually needed.

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. This outsourcing is sometimes done through broker-dealers. More and more, it is done through registered investment advisers bound by a fiduciary duty to put the interests of clients above theirs. Such advisers include those that are primarily asset management companies. In turn, if you are a high-earning and successful individual, you can pay someone else to handle your portfolio. You, in turn, can focus on making more money and not on reading 10-K filings or the fine print of mutual funds.

Wall Street is like a repository for investments across a variety of types of securities.

When people think of Wall Street, they often have the secondary market in mind. This is the buying and selling of existing shares of outstanding stocks by individual investors through their retirement and brokerage accounts. What's of interest is the daily movement of the major stock market indices, such as the Dow Jones Industrial Average and S&P 500

How Does Trading on Wall Street Work?

Trading on all types of markets—including the stock and bond markets that comprise Wall Street— involves many factors that affect prices. You will find market makers that are central to all trading exchanges. These market makers, also known as broker-dealers, are integrated into the trading system to ease the flow of money and trades.

Most investors believe the prices of traded securities are based on factors such as management changes, news events, and corporate actions. What many investors often do not realize is that market makers and the supply and demand for a traded security on any given day may also have a large impact on the trading price.

Market makers come in several forms. These range from individuals trading on the exchange floors to electronic communication networks. Every transaction on an exchange needs a party willing to take the opposite side of the trade. Market makers work as a go-between and earn a small fee for their service in the process.