Margin-of-Safety

2
The Nature of Wall Street Works
Against Investors
investors in marketable securities have little choice but to deal with Wall Street. The sad truth is,
however, that many investors are not well served in their dealings with Wall Street; they would
benefit from developing a greater understanding of the way Wall Street works. The problem is that
what is good for Wall Street is not necessarily good for investors, and vice versa.
Wall Street has three principal activities: trading, investment banking, and merchant
banking. As traders Wall Street firms act as agents, earning a commission (or trading spread) for
bringing buyers and sellers together. As investment bankers they arrange for the purchase and
sale of entire companies by others, underwrite new securities, provide financial advice, and opine
on the fairness of specific transactions. As merchant bankers they commit their own capital while
acting as principal in investment banking transactions. Merchant banking activity because
increasingly important to Wall Street in the late 1980s but almost completely ceased in 1990 and
early 1991.
Wall Street firms perform important functions for our economy they raise capital for
expanding businesses and (some-