The History of the American Stock Market (Part 1)

The first stock markets got their start as kings, merchants, and adventurers traveled to new, unexplored lands in search of new riches. But it was the development of new technology that helped transform early markets into the exchanges we all know and recognize today.

A Brief Introduction to the Markets

The first exchanges were for debts, rather than assets. Medieval kings and crusading lords had to borrow money to fund their expeditions and wars. They borrowed the money from wealthy merchants by selling part of the debt to other merchants in exchange for a share in the profit when the debts were repaid with interest. Today, we call this trading of debt “bond markets”.

In order for the great shipping nations of Europe to explore and discover new lands and resources such as gold, spices, raw materials, and other luxuries, the fleets of ships being used had to be funded. In some cases, the monarch funded the exploration. Ferdinand and Isabella of Spain funded Columbus’s voyage of 1492, for example. In other cases, the funding came from merchants. Rather than merely lend the money and trade the bonds to reduce the risk, merchants began to join together to form a company that funded their own venture. They were, literally, the first venture capitalists.

Initially, a new company would be formed for each voyage and be disbanded when the fleet returned. As the process evolved, the same company with the same jointly held stock (hence joint-stock company) owned by the same merchant adventurers would fund new trading ventures. Many companies grew wealthy, and their stock became a valuable, highly sought after asset in its own right.

Instead of buying stock shares for cash, they could simply be traded. Because not every ship would return to port, laden with goods for sale, merchants would spread their risk by exchanging stocks in one business venture for stocks in another.

The regular trading of stock certificates in the sixteenth and seventeenth centuries grew into an official, formal, and controlled element of modern-day finance. The world had become a larger place with international trade.

Now let us jump ahead and look at the more recent history of the stock market.

The First Stock Exchanges

Great Britain was the center of one of the greatest empires as well as the center of trade, commerce, and industrial output in the late 18th century. London saw the world’s first official stock exchange open in 1773. The London Stock Exchange (LSE) could not actually trade stocks at the time: unscrupulous business owners had caused so much financial damage that the speculative trading of stocks was illegal until 1825. Outside financing was needed for new ventures, so investors bought stock in these new companies (they just could not trade existing stock certificates among themselves).

In 1792, the New York Stock Exchange (NYSE) opened its doors. New York was the center of America’s domestic and international trade, banking, and manufacturing. The NYSE was America’s second stock exchange, the first one being the Philadelphia Stock Exchange, which began in 1790. Both markets were able to speculatively trade in stocks. The NYSE quickly outgrew its Philadelphia competitor and is, today, the largest stock market on the planet.

NYSE’s Early Days

Stock traders used to meet on the open street, and were known as “curbstone brokers”. As they formalized their role and location, 24 of America’s leading brokers met under a buttonwood tree to sign “The Buttonwood Agreement” which created the NYSE, and they moved their location to Wall Street.

The brokers established rules and set fees for trading. They copied many European practices, and the NYSE became a wealthy organization. The most important regulations the NYSE established were “listing requirements.” For a company to be quoted and traded on the NYSE, it must meet certain standards.

Listing requirements cover, for example, a company’s size (its annual income or its market value) and its liquidity. Liquidity essentially means how quickly its stock can be traded at a given value. Any stock can trade quickly at a bargain price, but overall stability is needed for owners who buy and sell the stocks. Today, if a company wants to be traded on the NYSE, it must have issued at least 1.1 million shares for public-trading, and they must be worth at least $100 million.

As America’s economy and its place in the world grew, so did the power and authority of its stock markets. New stock exchanges opened in other major economic areas. For example, Chicago in the Midwest and Los Angeles on the west coast.

Existing industries grew and new industries began. Rules and regulations developed to cope with both business complexity and the expanding world of international trade brought on by the rise of technology. Traders and owners (including pension companies) and other institutional investors needed new clear and trusted methods of stock valuation and comparison. New trading floors opened their doors to address the needs of the new marketplaces.

In Part II of this blog, which will be posted in a few days, we will look at how the stock market has changed to meet the demands of both growth and these new industries.