Stock markets are some of the most important parts of today’s global economy. Countries around the world depend on stock markets for economic growth.
However, stock markets are a relatively new phenomenon. They haven’t always played an important role in global economics. Today, I’m going to share the history of the stock market and explain why stock markets have become the driving economic force they are today.
Early stock and commodity markets
The first genuine stock markets didn’t arrive until the 1500s. However, there were plenty of early examples of markets which were similar to stock markets.
In the 1100s, for example, France had a system where courretiers de change managed agricultural debts throughout the country on behalf of banks. This can be seen as the first major example of brokerage because the men effectively traded debts.
Later on, the merchants of Venice were credited with trading government securities as earl y as the 13th century. Soon after, bankers in the nearby Italian cities of Pisa, Verona, Genoa, and Florence also began trading government securities.
The world’s first stock markets (without stocks)
The world’s first stock markets are generally linked back to Belgium. Bruges, Flanders, Ghent, and Rotterdam in the Netherlands all hosted their own “stock” market systems in the 1400s and 1500s.
However, it’s generally accepted that Antwerp had the world’s first stock market system. Antwerp was the commercial center of Belgium and it was home to the influential Van der Beurze family. As a result, early stock markets were typically called Beurzen.
All of these early stock markets had one thing missing: stocks. Although the infrastructure and institutions resembled today’s stock markets, nobody was actually trading shares of a company. Instead, the markets dealt with the affairs of government, businesses, and individual debt. The system and organization was similar, although the actual properties being traded were different.
The world’s first publically traded company
The East India Company is widely recognized as the world’s first publically traded company. There was one simple reason why the East India Company became the first publically traded company: risk.
Put simply, sailing to the far corners of the planet was too risky for any single company. When the East Indies were first discovered to be a haven of riches and trade opportunities, explorers sailed there in droves. Unfortunately, few of these voyages ever made it home. Ships were lost, fortunes were squandered, and financiers realized they had to do something to mitigate all that risk.
As a result, a unique corporation was formed in 1600 called “Governor and Company of Merchants of London trading with the East Indies”. This was the famous East India Company and it was the first company to use a limited liability formula.
Investors realized that putting all their “eggs into one basket” was not a smart way to approach investment in East Indies trading. Let’s say that a ship returning from the East Indies had a 33% chance of being seized by pirates. Instead of investing in one voyage and risking the loss of all invested money, investors could purchase shares in multiple companies. Even if one ship was lost out of 3 or 4 invested companies, the investor would still make a profit.
The formula proved to be very successful. Within a decade, similar charters had been granted to other businesses throughout England, France, Belgium, and the Netherlands.
In 1602, the Dutch East India Company officially became the world’s first publically traded company when it released shares of the company on the Amsterdam Stock Exchange. Stocks and bonds were issued to investors and each investor was entitled to a fixed percentage of East India Company’s profits.
Selling stocks in coffee shops
Before investors yelled across trade floors and threw order forms into the air, they conducted business in coffee shops. Early stocks were handwritten on sheets of paper, and investors traded these stocks with other investors in coffee shops.
In other words, coffee shops were the first real stock markets due to the fact that investors would visit these markets to buy and sell stocks. Before long, somebody realized that the entire business world would be more efficient if somebody made a dedicated marketplace where businessmen could trade stocks without having to order a coffee or yell across a crowded café.
The first stock market bubble
Nobody really understood the importance of the stock market in those early days. People realized it was powerful and valuable, but nobody truly understood exactly what it would become.
That’s why the early days of the stock market were like the Wild West. In London, businesses would open up overnight and issue stocks and shares of some crazy new venture. In many cases, companies were able to make thousands of pounds before a single ship had ever left harbor.
There was no regulation and few ways to distinguish legitimate companies from illegitimate companies. As a result, the bubble quickly burst. Companies stopped paying dividends to investors and the government of England banned the issuing of shares until 1825.
The first stock exchange
Despite the ban on issuing shares, the London Stock Exchange was officially formed in 1801. Since companies were not allowed to issue shares until 1825, this was an extremely limited exchange. This prevented the London Stock Exchange from preventing a true global superpower.
That’s why the creation of the New York Stock Exchange (NYSE) in 1817 was such an important moment in history.
The NYSE has traded stocks since its very first day. Contrary to what some may think, the NYSE wasn’t the first stock exchange in the United States. The Philadelphia Stock Exchange holds that title. However, the NYSE soon became the most powerful stock exchange in the country due to the lack of any type of domestic competition and its positioning at the center of U.S. trade and economics in New York.
The London Stock Exchange was the main stock market for Europe, while the New York Stock Exchange was the main exchange for America and the world.
Modern stock markets
Today, virtually every country in the world has its own stock market. In the developed world, major stock markets typically emerged in the 19th and 20th centuries soon after the London Stock Exchange and New York Stock Exchange were first created. From Switzerland to Japan, all of the world’s major economic powers have highly-developed stock markets which are still active today.
Canada, for example, developed its first stock exchange in 1861. That stock exchange is the largest in Canada and the third largest in North America by market capitalization. It includes businesses based in Canada and the rest of the world. The TSX, as it is known, hosts more oil and gas companies than any other stock exchange in the world, which is one major reason why it has such a high market cap.
Even war-torn countries like Iraq have their own stock markets. The Iraq Stock Exchange doesn’t have a lot of publicly-traded companies, but it is available to foreign investors. It was also one of the few stock markets unaffected by the economic crisis of 2008.
Stock markets can be found around the world and there’s no denying the global importance of stock markets. Every day, trillions of dollars are traded on stock markets around the world and they’re truly the engine of the capitalist world.
After dominating the world economy for nearly three centuries, the New York Stock Exchange faced its first legitimate challenger in the 1970s. In 1971, two organizations – the National Association of Securities Dealers and Financial Industry Regulatory Authority – created the NASDAQ stock exchange.
NASDAQ has always been organized differently from traditional stock exchanges. Instead of having a physical location, for example, NASDAQ is held entirely on a network of computers and all trades are performed electronically.
Electronic trading gave the NASDAQ a few major advantages over the competition. First and most importantly, it reduced the bid-ask spread. Over the years, competition between Nasdaq and the NYSE has encouraged both exchanges to innovate and expand. In 2007, for example, the NYSE merged with Euronext to create NYSE Euronext – the first transatlantic stock exchange in the world.
Dow Jones Industrial Average and other major indices
Stock market indices are an important part of modern stock markets. The Dow Jones Industrial Average is arguably the most important index in the world.
The index was one of several indices first created by Wall Street Journal editor Charles Dow, who also co-founded Dow Jones & Company (the other co-founder was notable investor Edward Jones).
The so-called Dow Averages were first published in 1885. The Dow Jones Industrial Average is made up of 30 large publically-owned American companies who play a key role in the American economy. The index started as a list of companies involved in heavy industry, which is why it’s called the “Industrial” Average.
Today, many of the companies listed on the index have little to do with heavy industry. Companies are added and removed from the index over time to reflect their influence on the U.S. economy. Notable companies currently on the DJIA include:
- American Express
- Goldman Sachs
- General Electric
The DJIA is a list of some of the wealthiest and most powerful companies in America. General Electric is the longest-running company on the index, having last been added in 1907. General Electric is also the only company on the DJIA that was also on the original DJIA.
Recently removed companies include Bank of America and Hewlett-Packard, both of which lost their index status in September 2013.
Other major stock market indices include the Nasdaq Composite, the S&P 500, and the Russell 2000.
Major stock market crashes throughout history
Stock market crashes are an unavoidable side effect of any market where public attitudes play a role.
Most major stock markets have experienced crashes at some point in history. Stock market crashes are by nature preceded by speculative economic bubbles. A stock market crash can occur when speculations are stretched far beyond the actual value of a stock.
There have been a number of major crashes throughout history, including Black Thursday or Terrible Thursday of 1929, which was followed by Black Monday and Black Tuesday. During this crash, the Dow Jones Industrial Average lost 50% of its value, sending America and much of the world into a deep economic depression and wiping out billions of dollars.
Other major stock market crashes include:
- Stock Market Crash of 1973-1974
- Black Monday of 1987
- Dot-com Bubble of 2000
- Stock Market Crash of 2008
All of these crashes pale in comparison to 1929 but still involved double digit percentage losses around the world. The advance of electronic trading has caused many to question the foundations of the stock market, including the theory of rational human conduct, the theory of market equilibrium, and the efficient-market hypothesis.
The stock market crash of 1987 was the first major crash of the electronic trading era and it was notable due to the fact that nobody really saw it coming. It was not predated by major news announcements or world affairs. Instead, it seemed to have just happened with no immediately apparent visible reasons.
The 1987 crash began in Hong Kong, where stock markets fell 45.5% between October 19 and October 31. By the end of October, major stock markets around the world had all experienced double digit collapses. Markets in Australia experienced a 42% drop, for example, while the United States and Canada both suffered losses of about 23%.
Stock market circuit breakers
In 2012, the world’s largest stock exchange – the NYSE – created something called a single-stock circuit breaker. If the Dow drops by a specific number of points in a specific period of time, then the circuit breaker will automatically halt trading. This system is designed to reduce the likelihood of a stock market crash and, when a crash occurs, limit the damage of a crash.
The Chicago Mercantile Exchange and the Investment Industry Regulatory Organization of Canada (IIROC) also use circuit breakers. Both the NYSE and Chicago Mercantile Exchange use the following table to determine how long trading will cease:
- 10% drop: If drop occurs before 2pm, trading will close for one hour. If drop occurs between 2pm and 2:30pm, then trading will close for one half-hour. If the drop occurs after 2:30pm, then the market stays open.
- 20% drop: If the drop occurs before 1pm, then the market halts for two hours. If the drop occurs between 1pm and 2pm, then the market closes for one hour. If the drop occurs after 2pm, then the market is closed for the day.
- 30% drop: No matter what time of day a 30% drop occurs, the market closes for the day.
When do stock markets close around the world?
One of the many advantages of having stock markets around the world is the fact that there is almost always a market open in some part of the world. Most of the world’s stock markets open between 9:00am and 10:00am local time and close between 4:00pm and 5:00pm local time. The NYSE, NASDAQ, TSX, and Shanghai Stock Exchange all open at 9:30.
Some stock markets also take a break for lunch. Four major Asian markets take a break for lunch that lasts for 1 hour to 1.5 hours in the middle of the day. Those markets include the Tokyo Stock Exchange, Hong Kong Stock Exchange, Shanghai Stock Exchange, and Shenzhen Stock Exchange.
Different countries celebrate different days of the year, which is why some global stock markets are still open on public holidays in the United States.
What are the largest stock markets in the world today?
The list of the top 10 largest stock markets in the world today indicates the changing roles of various countries throughout history. Today, the top 10 stock markets include markets in highly-developed countries as well as markets in developing parts of Asia.
Here are the top 10 stock markets in the world today ranked by market capitalization:
- New York Stock Exchange
- Tokyo Stock Exchange
- London Stock Exchange Group
- Hong Kong Stock Exchange
- Shanghai Stock Exchange
- Toronto Stock Exchange
- Frankfurt Stock Exchange
- Australian Securities Exchange
Other rising stock markets outside of the top 10 include the Bombay Stock Exchange based in Mumbai, India, as well as the BM&F Bovespa stock exchange based in Sao Paulo, Brazil.
The future of the stock market
Stock markets aren’t going away anytime soon. They remain a driving economic force in virtually every country in the world. Analysts aren’t entirely sure what the future holds for the stock market, although there are some important things to consider.
First, the NYSE remains the largest and (arguably) the most powerful stock exchange in the entire world. It’s so large, in fact, that its market capitalization is larger than Tokyo, London, and NASDAQ combined.
Second, we will likely see stock markets continue to merge over the coming years. Some have even suggested that we’ll eventually see a single global stock market, although this appears to be unlikely.
Whatever the future may hold for stock markets, they’re going to continue playing an important role in global economies around the world for the long foreseeable future.
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