Stock Markets and History of Stock Markets
Stock exchanges allow people and companies a place to trade marketable securities with each other. Companies or governments issue or redeem securities on stock exchanges. To understand the need for stock exchanges, we must first go back in time, far back in time, to see the first example of a stock exchange. One of the earliest recorded exchanges was founded in the 12th century. It allowed banks to manage and service the debts of communities that were economically based on agriculture. This business idea quickly spread throughout Europe.
One of the next places to trade was in Venice with bankers during the 13th century who traded in government securities. Other communities such as Pisa, Verona, Genoa, and Florence also began to trade securities. During this same time period, we see Bruges, in Belgium, exploding on the map. While many speculate that Bruges was the first exchange in the world, one thing no one doubts is how quickly it became the powerhouse in the area. The initial beginning of Bruges came when the commodity merchants gathered inside the home of an individual named Van der Burse. The ideas from Bruges also spread to places like Ghent and Amsterdam.
The first limited company ever started was made by the Dutch. Stock companies were a novel idea at the time. They made it possible to invest in a trading company. The difference was that the owners would either be paid a share of the profits or be liable for their share of the losses incurred by the business. This was the first time in history that commercial ventures could be undertaken without putting any investor at undue financial risk, while ensuring a highly profitable opportunity.
The first company to be formed as a public limited company was the Dutch East India Company, in 1602. The Dutch East India Company issued its first shares, which turned out to be the world’s first IPO (Initial Public Offering). It issued stocks and even sold bonds to investors. The sale of its shares took place on the Amsterdam Stock Exchange.
Many decades later, in 1688 to be exact, the London Stock Exchange was born. Trading on the London Stock Exchange began with the need to finance two voyages: the Muscovy Company’s attempt to reach China via the White Sea, north of Russia, and the East India Company’s voyage to India. Unable to finance these expensive trips privately, the companies raised the money by selling shares to the traders, entitling them to a portion of the profits they eventually made. The idea soon caught on. It is estimated that by 1695 there were 140 joint-stock companies. Stock trading centered on the city’s Change Alley, at two coffee shops: Garraway’s and Jonathan’s.
Stock exchanges were also developing in Germany. The origins of the Frankfurt Stock Exchange date back to the 9th century with Emperor Louis the German issuing a charter to hold free trade fairs. In the 16th century, Frankfurt became a wealthy and active city, with an economy based on trade and financial services. In 1585, a stock exchange was established to establish fixed currency exchange rates to allow trading in different currencies.
The Amsterdam Stock Exchange is considered the oldest in the world. It was established in 1602 by the Dutch East India Company (Verenigde Oostindische Compagnie, or “VOC”) to trade its stocks and bonds. It was later renamed the Amsterdam Bourse and was the first to formally start trading securities.
In the United States, it took nearly another century for our first official stock exchange to emerge. The first exchange in the United States was created at the corner of 68 Wall Street in New York City. They called the deal the Buttonwood Settlement, as it was signed by twenty-four brokers under a buttonwood tree. The name changed to the New York Stock and Exchange Board some time later. The New York Stock and Exchange Board rented a place at 40 Wall Street, in 1817, for just $200 a month. This location served them well for nearly 20 years, but was destroyed in the Great Fire of New York in 1835. Finally, some thirty years later, during the Civil War, the name was changed once more to its present name, the Stock Exchange. New York values. In those days there was no internet, radio or television. Most people got their information from word of mouth, newspapers, or short brochures. One such brochure was the “Client Evening Letter,” which was a two-page daily financial news bulletin produced by Charles Dow. This type of newsletter, or news service, was the precursor to news services like the Wall Street Journal. From the year 1884, the “Client’s Evening Letter” included a stock average called the Dow Jones Averages. This small list contained nine railway companies and two industrial companies. You may recognize that last name from Dow, since it’s the same name as the stock index, the Dow Jones Industrial Average. When it made its transition, in 1896, to the Dow Jones Industrial Average, it included 12 stocks from America’s major industries.
Many years later, with the computer revolution just beginning, the world needed an electronic stock exchange. In 1971, we got just that, the National Association of Securities Dealers, or NASDAQ for short. At first this was just a bulletin board for buyers and sellers to see posted prices, but it still didn’t allow actual orders to be placed via computers. With prices visible on one screen to everyone, the “spread” or the difference between the bid (buy) price and the ask (ask) price of a stock traded on an exchange was significantly reduced. Although the NASDAQ is a computer-based trading system, it wasn’t until 1987 that computers were finally used to process trades. Until the stock market crash of 1987, all orders were placed over the phone, where brokers called each other. During the Black Monday market crash, when brokers tried to call each other to sell or buy stocks, they avoided answering their phones. With no liquidity or trading in the market, stock prices spiraled downward, with no end in sight. This was a problem for the exchange. When panic hit the market, if no one was willing to trade with each other, the prices of everything on that exchange could drop to unthinkable lows, causing massive losses for everyone. To solve that problem, they created the Small Order Execution System (SOES). It allowed brokers to trade with market makers who would always honor trades regardless of market conditions.
In 1898, the Chicago Butter and Egg Board was established as a non-profit organization. The name was changed to the Chicago Mercantile Exchange (CME) in 1919. The CME specializes in trading commodities, derivatives, and futures. Today on the CME, many other financial instruments are traded like; interest rates, stocks, currencies, commodities, weather, real estate derivatives, options and futures. The CME is the world’s largest futures and options exchange.
The Chicago Board of Trade (CBOT), established in 1848, is the world’s oldest futures and options exchange. More than 50 different options and futures contracts are traded by more than 3,600 CBOT members, through electronic trading and open protest systems.
Concerns by US traders to ensure that there were buyers and sellers of commodities resulted in forward contracts to buy and sell commodities at future dates. This means that traders wanted to buy commodities at future dates and sellers were concerned about what the price would be in the future. Forwards and futures contracts allow both parties to set the price they pay for a commodity in advance, ensuring that everyone is protected against wild price swings before the contract delivery date. Credit risk also remained a serious problem in the economy. The CBOT solved this problem by providing a centralized location where buyers and sellers could come together to negotiate and execute forward contracts. In 1864, the CBOT listed the first standardized “exchange-traded” forward contracts, which were called futures contracts.
The Chicago Board of Trade established the Chicago Board Options Exchange (CBOE) in 1973. This was the first exchange to list standardized, exchange-traded stock options. They allowed the option to buy a share at a future date for a specified price.
The Wall Street Journal estimated that worldwide, as of April 11, 2007, the market capitalization of the derivatives markets (futures, options, swaps, forwards, etc.) exceeded $450 trillion dollars. US stock markets held about $30 trillion and the rest of the world’s stock markets totaled another $20 trillion. Global fixed income markets (bonds, etc.) totaled approximately $65 trillion.
The origins of the New York Mercantile Exchange (NYMEX) date back to 1872, with a group of Manhattan dairy merchants coming together and creating the New York Butter and Cheese Exchange. Soon, trading in eggs became part of the business conducted on the exchange and the name was changed to the Butter, Cheese and Egg Exchange. Finally, in 1882, the name changed to what we all know today, the New York Mercantile Exchange, and opened trade to dried fruits, canned goods, and poultry.
The New York Mercantile Exchange (NYMEX) is the world’s largest physical commodity futures exchange, located in New York City. Its two main divisions are the New York Mercantile Exchange and the Commodity Exchange, Inc (COMEX). The New York Mercantile Exchange handles billions of dollars in energy products, metals, and other commodities. They are bought and sold on the trading floor and on computerized electronic trading systems overnight. The prices quoted for exchange transactions are the basis for the prices that people pay for various commodities around the world.
The AMEX began in 1842 as a market on the curb of Broad Street, near Exchange Place, New York. Sidewalk brokers gathered around utility poles and mailboxes, weathering the wind and weather, listing stocks for sale. As business activity increased, so did the volume of transactions. The shouting reached such a level that hand signals for actions had to be introduced so that the brokers could continue trading. In 1921, the market moved inside the building at 86 Trinity Place, Manhattan, where it still resides. Hand signals were retained for decades, even after the move, as a convenient means of communication. AMEX’s core business has shifted over the years from stocks to options and exchange-traded funds, though it continues to trade small and medium-sized stocks.