The terms “Wall Street” and “Main Street” get tossed around a lot in conversations about the financial industry. But not everyone has a clear understanding of how they differ — especially when it comes to investing their money. Here’s how Wall Street and Main Street are different, and why that matters when it comes to shaping your investing strategy.
Wall Street, Explained
Collectively, “Wall Street” refers to the people and organizations that are directly connected to the stock market, including the stock exchanges, investment banks, large corporations, brokerages and other financial institutions. Their main objective, of course, is to generate profits for companies and other large investors.
Wall Street is primarily concerned with big business and the actions of corporations and publicly traded companies. A Wall Street analyst might look at things like a company’s most recent earnings report and their previous year’s revenues as a basis for creating an investment strategy.
From an economic perspective, Wall Street matters because much of what happens there can directly impact the broader economy. Think back to the financial crisis of 2008. It was Wall Street’s treatment of mortgage securities that played a starring role in the housing crash and the recession that followed.
What happens on Wall Street can also influence consumer behavior, which in turn shapes economic trends. When stock prices soar during a bull market, for example, consumers usually spend more money because they have confidence in where the economy is headed. That in turn can spur economic growth.
Main Street, Explained
Main Street can be thought of as representing the little guys — the everyday investors in capital markets and the small business owners who look to Wall Street to help them grow their money. When you invest $5,000 in a mutual fund, for instance, you’re putting your capital into Wall Street.
As a term, “Main Street” also describes the broader economy itself and the smaller firms that aren’t connected directly to the financial services sector. A mom-and-pop retail store or restaurant would fit the definition of Main Street as would a small, family-owned investment or insurance company.
But perhaps what defines Main Street the most is its intentions. In contrast to Wall Street — which is focused on profiting from movements in the financial markets — Main Street is more interested in investing in those markets. That doesn’t mean, however, that there isn’t overlap between the two.
Wall Street relies on individuals to pump money into the financial markets through investments. At the same time, those individual “Main Street” investors rely on Wall Street to deliver better returns on their money than they might get with a regular savings account. In a nutshell, each one needs the other to achieve their respective goals.
Investing in Wall Street vs. Main Street
There’s another way to look at the difference between Wall Street and Main Street when it comes to investing your money.
Individual investors usually gravitate toward stocks, bonds, mutual funds and other securities to build a diversified portfolio. The premise is that by investing your money, it will grow over time, assuming the securities you’ve chosen increase in value.
Investing in Main Street, on the other hand, means investing directly in businesses or startups. The JOBS Act of 2012 made that possible for a wider group of investors by easing restrictions on crowdfunding. These days you can use a peer-to-peer lending platform, browse loan requests from business owners and invest money in the ones you want to support. You, along with the other investors who helped fund the loan, earn returns on your investment when the business owner repays the loan with interest.
People who want to feel more connected to the companies and businesses in their portfolio might choose to invest in Main Street over Wall Street. With the latter, it’s easier to feel disconnected when you’re simply trading stocks on an exchange.
The caveat: Investing in Main Street can be just as risky, if not riskier, than investing in Wall Street since there are no guarantees that a small business or startup will succeed. Diversifying your portfolio to include investments that represent both Wall Street and Main Street is one way to balance out some of the risk.
The Bottom Line
Wall Street and Main Street represent two different aspects of investing and the financial sector. If you’re a Main Street investor, then you look to Wall Street to help you make the most of your money. Although Wall Street and Main Street don’t always have a perfectly symbiotic relationship, both are integral to keeping the U.S. economy moving.
Tips for Individual Investors
- Investing is something you can do on your own, but it may be helpful to have a financial advisor by your side to work with. When comparing advisors, pay attention to the services they offer, their investment style, what fees they charge and how they make money, as well as what type of clients they typically work with. This can help you find an advisor whose background and experience most closely aligns with your needs.
- Finding a financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
Photo credit: ©iStock.com/stevecoleimages, ©iStock.com/kali9, ©iStock.com/scyther5