How Did Stock Markets Develop?

Revision as of 01:59, 18 October 2019 by Altaweel (talk | contribs) (Early History)

Stock markets developed over the last few centuries into companies issuing shares and investment opportunities to shareholders. Stock markets very much drive modern economies but the ideas behind them are a few centuries old. Nevertheless, the concept of investing into firms or organizations that reap rewards for shareholders engaged in trading is an ancient one and goes back millennia.

Early History

Investments and shared ownership ideas have been around for millennia. Already in the Old Assyrian period, about 4000 years ago in what is today Turkey and Northern Iraq, there were investment families living in the city of Ashur, in northern Mesopotamia (Iraq), who conducted trade transactions with representatives, often from the same family, in Anatolian cities such as Kanesh. These family firms would also have investors who would pool money that would then fund trade caravans. Successful trade would bring great reward for investors, but risks included raiding or natural disasters that could also lead to financial ruin. Similarly, in the Roman and Classical period, enterprise, often dealing with long-distance trade, would involve wealthy families jointly investing and holding shares in trade endeavours. This would include financing trade excursions and investments in different businesses.[1]

In the Medieval period around the 12th century, in France, debt held by banks would be traded. Similarly, the Venetians in the 13th century traded government securities, similar to bond markets. Soon, companies began to issue shares as a means to also finance their enterprises, somewhat similar to the Old Assyrian trade colonies allowing wider participation and financing of trade. This practice continued to spread in Western Europe, with England and Holland creating trade houses that would issue shares for companies during the 16th century. This led to the emergence of the idea that companies can also be owned by shareholders, and not just leading families borrowing money from others, creating formal joint stock companies that would have many individuals rather than a single family business. The biggest changes, however, occurred in the early 17th century, when the Dutch East India Company issued shares that were distributed to the public for purchase and investment (Figure 1). While having shares in a company goes back to antiquity, this development was pioneering because it was a persistent trade of shares in a public format that enabled a market around shares to develop. Amsterdam soon became a new entrepreneurial center that not only developed the idea of a market where shares would be traded but also it developed other forms of investments that we have today, including options and more speculative growth investments about the direction in which the company may go. The emerging stock market in Amsterdam began to have formal trading hours and soon even a book, called Confusion de Confusiones, written in 1688 by Joseph de la Vega, described how to actively trade in the stock market as they attempted to understand how this market worked.[2]

Figure 1. The Dutch East India Company was the first company to be publicly traded in the first stock market established in Amsterdam in 1602.

Later Developments

The idea of a stock market began to spread throughout Europe. London soon emerged as a key center, with traders at first meeting in a coffeehouse in the early 18th century. The coffee house became very active for trade and soon was completely take over by traders who formalized the name "stock exchange" in the English language. In the 18th century, as English explorers began to spread across North America, many of their expeditions, including trading for furs and other exotic products, began to be financed by stock exchange trading. Perhaps though the biggest turning point for the early stock market in establishing itself as a strong link to the wider economy occurred during the Industrial Revolution from the late 18th century through the early 19th century. The London stock market was seen as a place where startup enterprises would be financed and new companies would seek venture capital and financing from stock investors.[3]

In the United States, in 1792, on the corner of Walled Street and Broadway in New York, that country's first stock exchange was setup. It was formalized through the Buttonwood Agreement at 68 Wall Street underneath a buttonwood tree (Figure 2). In 1817, the same organization moved to 40 Wall Street and formally changed their name to the New York Stock and Exchange Board, the same name used today. Government bonds and the First Bank of the United States, a government bank, were initially traded. The first private company to be traded was the Bank of New York. The Bank of North America soon afterwards also became among the early companies trading at the New York Stock Exchange. Throughout out the 19th century, other cities, such as Philadelphia, also established stock markets as places to trade securities and stocks in companies. In fact, Philadelphia became one of the main competitors to New York's stock market. However, in the early to mid 19th century, panics became common and this would great affect traders. Among the relatively resistant markets was the New York Stock Exchange, which made it more favourable for companies and brokers for conducting trades. The telegraph also meant that every city did not need a stock market, as a single trading exchange could conduct transactions for many companies. Trades slowly transformed from single calls sent by message to transactions sent by telegraph to speedup trading.[4]

Figure 2. The Buttonwood Agreement helped establish what would become the New York Stock Exchange.

Modern Stock Markets

Throughout the late 19th century and early 20th century, stock markets became more directly linked with the major companies in countries, which were often rail, coal, and steel industries. Financing came from stock exchanges and company success began to depend on increasing growth of stock values. This increasingly also made the economy vulnerable to panic selling and there was no regulation to stop runaway selling. The Black Thursday and Black Tuesday crashes of October 24 and 29, 1929 are widely seen as the triggers for the Great Depression of the 1930s. These were examples of panic selling that greatly reduced financial flows to major companies. To prevent panics such as these major crashes, new rules were introduced in the 1930s and the creation of the U.S. Securities and Exchange Commission in 1934 helped regulate financial markets around the country, in particular the New York Stock Exchange. The Great Depression also demonstrated that the global economy, and not just the economy of the United States, began to become more linked so that panic selling in one stock market began to affect other stock markets and economies. Markets such as London and New York, with now both these exchanges increasingly playing a dominant role in the global economy, had also began to use stock exchanges to invest in other countries' businesses. This created some of the links that led to the panics and triggers in other countries that precipitated a global depression in the 1930s. The 1980s saw new innovations such as electronic trading and by the 1990s electronic trading services made trades almost instantaneous, a far cry to the pre-1980s system where open calls and shouting were used as the main way in which trade was conducted.[5]

Throughout the 20th century, the main trend has been increased expansion of the stock market in the wider economy, where it even touched average consumers since the World War II era. In the United States and some developed economies, pensions and retirement funds are typically invested in stock markets. This has not only increased the level of funding in stocks, but it is now seen as a standard way in which to manage one's retirement as average life expectancy progressively increased in the 20th century. As stock markets have spread and increased to most countries today, their main purpose has not shifted greatly. Stock markets are mainly seen as a way for companies to raise funding and trade debt. More regulation increased after the 1930s; however, deregulation occurred once again in the 1980s that made stock transactions not only easier but put fewer limits to markets.[6]

Summary

Stock markets extend the ancient idea of investments in ventures by groups of individuals to the wider public. In fact, this idea of making companies public proved so popular in the 17th century that stock markets spread throughout Europe from that time. However, as stock markets increasingly became important in raising funds for firms, this also made the wider economy more vulnerable to panic selling and speculation. Many well known and relatively old stock markets are still located in the settings near or where they were first established, including the stock markets in London and New York. Today's global economy, for better or worse, would be impossible to develop without major financial centers and smaller stock exchanges that fund local businesses.

References

  1. For more on the Old Assyrian trade colonies and investments, see: Larsen, Mogens Trolle. 2015. Ancient Kanesh: A Merchant Colony in Bronze Age Anatolia. New York: Cambridge University Press.
  2. For more on Medieval stocks and development of the first stock market in Amsterdam, see: Cassis, Youssef, Richard S. Grossman, and Catherine R. Schenk, eds. 2016. The Oxford Handbook of Banking and Financial History. Oxford: Oxford University Press.
  3. For more on how stock markets spread and helped finance the Industrial Revolution, see: Caprio, Gerard, Douglas W. Arner, Thorsten Beck, Charles W. Calomiris, Larry Neal, and Nicolas Véron, eds. 2013. Handbook of Key Global Financial Markets, Institutions and Infrastructure. First edition. Boston: Elsevier.
  4. For more on the history of Wall Street and its importance to the United States, see: Geisst, Charles R. 2012. Wall Street: A History. Updated ed. Oxford ; New York: Oxford University Press.
  5. For more on how stock markets increasingly became interconnected with the wider economy and global economy, see: Smith, B. Mark. 2004. A History of the Global Stock Market: From Ancient Rome to Silicon Valley. University of Chicago Press ed. Chicago: University of Chicago.
  6. For more on modern stock market trading and how it has changed since World War II, see: Biggs, Barton M. 2009. Wealth, War and Wisdom. Hoboken, N.J.; Chichester: Wiley : John Wiley [distributor.
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