Does Wall Street Provide a Service or a Product?
By Ric Edelman
Make sure you understand how Wall Street really works
Wall Street and Detroit have nothing in common because Detroit manufactures cars and Wall Street manufactures nothing, right?
Wall Street is indeed a manufacturer. It creates and distributes products called investments; they are sold by brokers, bankers, insurance agents and financial advisors.
Wall Street’s manufacturing process is the same as Detroit’s: Figure out what people want to buy, design the product, build it and, finally, sell it to them. And just like there’s a used-car market, there is also a market for used stocks — called the secondary market, otherwise known as the New York Stock Exchange.
When designing new products, Wall Street tries to include three features that it knows are highly coveted by consumers: guarantees of safety, promises of high returns and avoidance of fees. Manufacturers know that sales will be good if they can produce a product that offers one of these features; they’ll become legends if they manage to offer a product featuring all three.
Wall Street also knows that, of the three features, safety is the most appealing — especially in today’s economy. Thus, it’s no surprise that many products new to the marketplace these days offer some illusion of safety, sometimes involving a guaranteed return of principal or a limit on any losses that can occur.
Some products also promise to give you higher returns than you can get elsewhere. But, of course, no one can legitimately guarantee no losses while simultaneously promising high returns and low costs. The best anyone can do is build a product that tries to reduce risk while offering the potential for gains. In other words, floors come with ceilings.
When considering any product, be sure to consider all the details. Some products have penalties or surrender charges, for example.
The best way to approach investments is the same way you shop for a car: Before visiting a dealership, decide what your needs are. That way, you’ll be more likely to drive home in a safe, reliable, affordable (yet enjoyable) automobile — and not an Edsel.