When people talk about stocks, one of the few things that will come to mind is investing. However, it wasn’t always the case. The first stock exchange originated on dealing with debts, and not a single stock was being traded at all.
During the 12th century in France, there were moneylenders called courretiers de change. They were concerned with managing and regulating the debts of agricultural communities throughout the country to fill gaps left by large banks. Moneylenders traded debts between each other, and they were considered as the first brokers. As their business evolved naturally, the lenders began to sell debt issues to customers.
The next century, the merchants of Venice became the first to start trading securities from other governments. They would meet with clients, bringing slates with information on the various issues for sale, just like what a broker does today. In 1351, the Venetian government outlawed spreading rumors intended to lower the prices of government funds. During the 14th century, bankers in Pisa, Florence, Venoa, and Genoa also began trading government securities. These were all independent city-states that time that was not lead by a duke, but a council of influential citizens, and that is why it was possible. Italian firms were also the first people to issue shares.
The official first beginning of stock exchange happened as far back as 1531 in Antwerp, Belgium. Antwerp was the commercial center of Belgium, and the influential Van der Beurze family had a building there, and as a result, early stock markets were called Beurzen. Moneylenders and brokers would meet there to deal in government, business and even individual debt issues, dealing exclusively in bonds and promissory notes.
The idea spread around Flanders and Bruges, as well as in Ghent and Rotterdam in the Netherlands. These cities all hosted their own stock market systems back then. However, there were no real stocks – they produce income like stocks do, but there was no official share that changed ownership.
In the 1600s, the British, French and Dutch governments all gave charters to companies with East India in their names. When the West Indies were discovered to be a haven of riches and trade opportunities, explorers sailed there. However, it was too risky because only a few of them make it back home successfully – some ships were squandered by Barbary pirates, some were devastated by the weather, and some were lost – all these causing them to lose money and manpower. In order to lessen risks of ruining their fortunes, ship owners sought investors who would put up money for the voyage, equipping the ship and crew in return for a part of profits if the voyage were successful. Some investors spread the risk by investing in different ventures at the same time.
As a result, the “Governor and Company of Merchants of London trading with the East Indies” was formed, and was eventually called the famous East India Company – the first company to use a limited liability formula. They had stocks that would pay dividends on all the proceeds from all the voyages the firms undertook, rather than going voyage by voyage. The formula proved to be successful, and within a decade, charters like those have been granted to other businesses in Belgium, England, and the Netherlands.
By 1602, the Dutch East India Company officially became the first publicly traded company in the world when it released shares of the company on the Amsterdam Stock Exchange. Stocks and bonds were issued to investors, who became entitled to a fixed percentage of profits made by the East India Company.
Before the existence of trading floors, investors traded stocks with each other in coffee shops. Early stocks were handwritten in sheets of paper. Shares for sale and debt issues were written and posted on shops’ doors or mailed as newsletters.
During the early days of the stock market, people realized it was valuable and powerful, but they did not understand exactly what it would become. The British East India Company monopolized the market and was backed by the government for doing so, making it the firm to have the biggest competitive advantage in the financial industry. When the investors began to receive huge profits and sell their shares for fortunes, other investors were motivated to do the same.
The stock market quickly created a financial boom in England and there were no profound rules and regulations for issuing shares. There were also no laws and guidelines to distinguish legitimate companies from illegitimate ones. One firm, the South Seas Company (SSC), emerged with a similar charter and was able to make thousands of pounds before its first ship ever left the harbor. So as some were encouraged by the success of SSC and realized it hasn’t done anything yet when it already made much money– some aspiring “businessmen” started to offer new shares in their own ventures. There were some absurd ideas, but they all sold. As a result, the bubble burst quickly. SSC failed to pay any dividends off its inadequate profits. The crash caused the government of England to ban the issuing of shares until 1825.
The London Stock Exchange was formally founded in 1801 despite the ban. In 1817, the most powerful stock market today – the New York Stock Exchange (NYSE) – was created in the United States. However, it was not the first stock exchange in the country; it was the Philadelphia Stock Exchange doing action along Chestnut Street.
The NYSE dealt with trading stocks since its first day at Wall Street. It was formed by 24 brokers who were forced to do business outside the coffee houses because they were already jam-packed. They first formed the Tontine Association in the 1790 to build a new coffee house for themselves so that they can have a place to trade. While the new coffee house was being built, they met under a buttonwood tree and formed the Buttonwood Agreement, which set a floor commission rate charged to clients and bounded signers to give preference to other signers in securities sales.
By the time of the American Revolution, Wall Street was home to the city’s markets and merchants and became the base for most banks and large corporations. It was the heart of all the business and trade coming to and from the United States. Facing few domestic competitions for the next two centuries, the NYSE rose to international status and became the most valuable stock exchange in the world. The London Stock Exchange, meanwhile, remained the main stock market for Europe.
Virtually every country in the world eventually had their own local stock market. Many major stock markets emerged during the 19th and 20th centuries after the London and New York Stock Exchange were established.
One important part of the stock market is the stock market index, which indicates the movements of the prices in a market or section of a market. The index is usually market capitalization weighted, with weights reflecting the contribution of the stock to the index. In 1896, Wall Street Journal editor Charles Dow calculated his first average purely of industrial stocks, which eventually became known as the Dow Jones Industrial Average (DJIA). The DJIA is the most important stock market index in the world.
The DJIA is made up of 30 large American firms that are publicly owned and played a key role in the American economy as a whole. Over time, companies were added and removed to reflect their influence on the economy of the United States. Other examples of the stock market index include the NASDAQ composite, Russell 2000, S&P 500, FTSE 100, Nikkei 225 and the Euronext indices.
The stock market was not without problems. It experienced crashes at some point. One of the major crashes that happened in the history of the world was the Wall Street Crash of 1929, which was also known as the Black Tuesday. It was the most devastating market crash in the United States because half of the DJIA value was lost, sending America and many parts of the world into the Great Depression. The crash urged NYSE to form stricter listing and reporting requirements.
After dominating the global economy for almost three centuries, the NYSE had its first legitimate competitor in the 1970s – the National Association of Securities Dealers Automated Quotations, or NASDAQ. It was formed in 1971 by the National Association of Securities Dealers, which is now called the Financial Industry Regulatory Authority. NASDAQ was not a typical stock exchange – it does not occupy a physical space as it is the world’s first electronic stock market. It also has the highest number of listings among stock markets globally.
Electronic trading gave it an edge over the competition as it reduced the bid-ask spread. The competition from NASDAQ encouraged NYSE to innovate and expand. In 2007, NYSE merged with Euronext to form the first trans-Atlantic stock exchange in the world.
By 2012, the NYSE created a single stock market circuit breaker. If the Dow drops by a specified number of points in a specific period of time, the circuit breaker will automatically close trading to reduce the likelihood of a stock market crash. If a crash would occur, the circuit breaker would limit its damage.
Today, the NYSE remains the largest and the most powerful stock exchange on the planet, with capitalization bigger than the next big three stock markets – the NASDAQ, Tokyo, and London –combined.
There’s no denying the importance of stock markets in the world economy. They are and will remain a driving force to the economy of every country, as every single day, trillions of dollars are being traded on stock markets around the world.