With some exceptions in the world, a country’s economic success relates to the health of the country’s stock market. Despite the existence of various types of “bubbles” throughout history, stock market correlates with the expectations about the performance of companies in the real world. As companies cannot always do well, the same happens with the stock market throughout its entire history. Since the early days of the stock market, “booms” and “crashes” succeed each other around the world. The effects of a stock market’s sudden and massive drop in value, can have a chain reaction and cause disruption in almost every industry within an economy. On the other hand, an up trending stock market is directly related to the positive sentiment in the economy and the increased confidence levels of businesses and investors. While this system has certainly been around for many years, it is a fairly new economic structure, having only been invented and systematized a few hundred years ago.
So how did the stock market come to be?
In the simplest terms, a stock represents a portion of a company or organization that the stockholder owns, and in exchange, the company secures capital for their projects. In the 1300s, Venice became one of the earliest examples of a stock market system, as moneylenders would give loans to the government and would exchange their debts amongst themselves.
In 1602, the East India Companies that were formed in Britain, France, and Holland, became the first internationally traded corporations in history. These companies were essentially groups of merchants who had a monopoly on spice trade during this time. The merchants would travel back and forth from Europe to India, bringing home with them spices and teas from that region.
Sailing such a far distance was expensive, so in an effort to fund these excursions and raise money to build fleets, they would take money from investors and promise percentages of the profit upon their return. This exchange was the earliest known form of an initial public offering (IPO) and publicly traded company. Investing in these merchants’ expeditions was risky as there was always a chance that the ships would be taken by pirates of the time or merchants could come back with fewer goods than expected.
The investors who gave money to the trading companies were issued shares on paper, but since there was no stock market at this time, investors would need a broker to be the middleman so that a transaction could take place. The buying and selling of stocks looked quite different during this time period, and in London, there would be postings on community walls that listed what shares were for sale.
South Sea Company
In England in 1711, a small merchant company called South Sea Company had a monopoly over the rights to charter to South America. As chartered companies had done in the past, South Sea also issued shares to investors, promising large dividends upon the return of these merchant ships. In the years that followed, the South Sea Company became extremely successful at selling shares but were less successful at actually paying dividends to shareholders. Around the year 1717, shareholders bought shares so they would be able to turn a profit on the share by selling it at a higher price. By 1720, the bubble that was created by this company burst, leaving investors with shares that were originally held at ten times the value.
First Stock Exchange
London’s government had outlawed the issuing of shares immediately after the South Sea Company had a negative impact on England’s economy. In 1773, the London Stock Exchange was formed but it wasn’t until 1825 that issuing shares became legal again in England. Because trade was limited and companies were unable to issue new shares, the London Stock Exchange was slower to develop than the New York Stock Exchange.
New York Stock Exchange
The Philadelphia Stock Exchange (PHLX) was created in 1790, and 27 years later the New York Stock Exchange (NYSE) quickly became the United States’ strongest exchange. The NYSE was created by twenty-four brokers who wanted to have a central location for their stock transactions. At this time, the NYSE is the strongest exchange in the world due to its centralized location in New York City and because transaction capital exceeds that of the other exchanges in the world.
As technology advanced in the mid-twentieth century, computers began to take a commanding lead in the lives of investors. In 1971, a new kind of stock exchange was created that did not have a physical location and was based on an electronic exchange of computers. The National Association of Securities Dealers Automated Quotations (NASDAQ) was cutting edge at the time of its inception and in the years that followed was known for attracting new tech startups that wanted to sell their initial public offering stocks or bonds.
In this day and age, nearly every country in the world relies on stock exchanges that reflect the fluctuations of the country’s economy. Even non-investors know the significance of having a healthy market and most keep their eyes on whether or not experts are worried about the condition of the stock market.
A stock market system keeps the free market system moving in a positive direction. The ability for companies to raise capital and fund their future projects allows those companies with a vision but not the necessary capital at their disposal to continue and achieve funding of their goals. This system enhances and forces companies to adapt to the ever-changing landscape of performance criteria set by investors and other stakeholders. As a result, innovation and adaptation to the new rules and trends are inevitable.