The History of Stock Markets

Stock markets in the broadest sense are places where securities may be bought and sold, or traded as this is called. This involves one party looking to buy the security with the other looking to sell it, exchanged for currency.

A lot of stock market activities occur on a stock exchange, which serves to regulate securities trading. Many people associate a stock exchange with a particular, famous one, such as the New York Stock Exchange. These are examples of stock exchanges, and a large percentage of securities do get exchanged on what we could call physical exchanges, this process is gradually becoming outdated, as electronic exchanges gain in popularity.

History of Stock MarketsSo any and all formal mechanisms for trading securities can be considered stock exchanges, and in spite of its name, stock exchanges don’t just involve trading in stocks, they also may offer other securities for trade, such as bonds. There may be specific exchanges set up though for specific forms of securities, a commodities exchange for instance where commodity futures are traded, these are all financial exchanges though.

Even the so called over the counter market, where traders trade securities with each other directly, without the involvement of an exchange acting as a governing body, is still a stock market, so stock market can be understood as the public trading of any securities really, as opposed to a private sale of shares for instance.

We should be using the term securities markets when we speak of stock markets, since that’s a more accurate description, but stock market is the expression that is most often used by the public.

Early Stock Markets

The history of stock markets isn’t as clear as it could be. Many scholars claim that stock trading began in the early 17th Century, although there is evidence that this goes all the way back to ancient Rome, where there are records that shares were traded, as evidenced by Cicero’s claim that shares were trading at a high price at the time of one of his speeches.

In order for shares to have a value like this, there would have to be a market for them, so we could say that there was a stock market of some type this far back in time.

It wasn’t until many centuries later that securities trading resurfaced, once again in Italy, where city-states started issuing tradeable government bonds during the late Middle Ages.

In 1602, the world’s first formal stock exchange was created, the Amsterdam Stock Exchange, initially to promote the trading of securities issued by the Dutch East India Company, the first company to issue corporate bonds and stock to the public. This was the first instance of what we would consider to resemble modern stock markets, with things like shares, dividends, advice preaching patience in holding stocks for the long term for capital appreciation, and so on.

The key to a modern stock market is the existence of a secondary market for the securities it issues, both its stocks and bonds. The primary market involves the issuing of the securities, where the issuer sells them to buyers, where secondary markets involve trading these securities among the public, and this is what we normally term financial markets or stock markets, the secondary financial markets.

This is what stock exchanges do primarily, they allow for the trading of securities among parties who are looking to buy and sell them, in other words they are secondary markets even though they may also handle primary issues as well.

For something to be called a stock market or financial market as we now know and define it, there does have to be the trading of securities involved, and this was the case with the issues of the Dutch East India Company.

This period also produced the first book written about stock market trading, in 1688, called Confusion of Confusions, written by Joseph de la Vega, a successful stock trader of the day. It described the workings of the Amsterdam stock market and provided general advice on being successful in this enterprise.

The Idea of Stock Markets Catches On

After the success of the Amsterdam Stock Market, the idea of creating other stock markets spread, although it took almost a century for this to catch on elsewhere. In the late 17th century, King William III of England sought a way to help pay for the country’s wars, and started issuing government bonds, which led to the establishment of the Bank of England.

As people bought these bonds, this created an interest in trading them, and private companies decided to get in on the action themselves by issuing their shares to the public, which also sparked interest in trading, as public stock always does.

This is the idea behind a public stock or bond issue, and this does require a mechanism in place for people who buy these issues to sell them to others, and for others to buy the stock or bonds after they are issued, not from the issuer but from the public holding the securities.

The natural place for this stock trading activity to take place in London was at the Royal Exchange, which at the time was the center of commerce in the city for over a hundred years. Around the time that stock trading and stock brokers started to catch on in London, new regulations along with their perceived rudeness ended up driving out the new stock brokers, who ended up locating a short distance away at Jonathan’s Coffee House.

Several other coffee houses in the area also took in stockbrokers, as well as their customers, and this area became known as Exchange Alley. These coffee houses were the forerunner of the London Stock Exchange. One of them, Lloyd’s Coffee Shop, grew to become Lloyd’s of London, one of the world’s largest insurance underwriters.

These coffee houses posted securities trading prices on their boards and patrons would visit to trade the securities. It wasn’t until 1801, a century after Exchange Alley was founded, that the London Stock Exchange was founded, and while some stock traders were initially reluctant to make the move, before too long the London Stock Exchange became the center of financial trading in the city.

Stock Exchanges Spread Around the World

Around the time of the official founding of the London Stock Exchange, the first securities became traded in the United States, by way of the Buttonwood Agreement of 1792. Government bonds were initially traded, along with the stock of a handful of banks.

As was the case in London, the precursor of the New York Stock Exchange got its start at a coffee house, but in this case they decided to rent out a dedicated trading space fairly early in their history.

This organization expanded during the early 19th century, to become the New York Stock and Exchange Board in 1817, later to be known as simply the New York Stock Exchange, or NYSE. The NYSE quickly became dominant among American stock markets.

In 1864, a new and strong competitor emerged on the scene, the Open Board of Stock Brokers was created, who offered a more modern system of financial trading and quickly grew to having almost as many members as the NYSE. The response from the NYSE was to merge with them 5 years later.

The NYSE is by far the largest stock exchange in the world, with around $20 trillion of market capitalization. They still do it the old-fashioned way, with real people trading on a real exchange floor, which is testimony to how conservative the stock market still has remained in spite of all of the technological innovations we’ve seen in recent years.

There are now several other major stock exchanges located in various parts of the world, in addition to many smaller exchanges. The top 10 in terms in order of market capitalization are the NYSE, the NASDAQ, the London Stock Exchange, the Japan Exchange Group, the Shanghai Stock Exchange, the Hong Kong Stock Exchange, Euronext, the Shenzhen Stock Exchange, the Toronto Stock Exchange, and the Deutsche Borse.

The Coming of Electronic Trading

Traditional securities trading is done by way of what is called open outcry, and although floor traders certainly are well assisted by communications technology these days, this traditional form of trading is still very popular.

Electronic trading has been around for quite a while now though. The NASDAQ was founded all the way back in 1971, and this was well before computers really made much of a dent into modern society, so it’s not that the securities industry lagged here as far as taking advantage of computers goes.

The NASDAQ, currently the second largest stock exchange in the world, is entirely based upon a network of computers, computers communicating with computers in other words. There is no exchange floor or person to person trading involved.

On electronic exchanges such as the NASDAQ, people still deal with market makers, securities firms, like they do on traditional exchanges, but things are simply more efficient. Securities firms can also trade with each other more easily and efficiently, intra-dealer trading as it’s called, which used to take place over the phone but is now done electronically.

Not only does electronic trading lead to lower costs, it’s also faster and is therefore more liquid, allowing for tighter spreads between bids and asks. Electronic trading also provides for greater access, and also is more transparent, where traders and brokers can see everything that goes on in a market with nothing being hidden, like it is to some degree with traditional means.

As time goes on, more and more trading is being done electronically, and some day all trading may be done this way, although old habits are hard to break. Electronic trading does benefit traders more though and while computers play a very big role in all trading these days, for instance with order entry and a lot of the execution, seeing the entire trade migrate to electronic means is the ultimate in efficiency.

Stock markets have certainly come a long way since they first emerged, but in some ways they haven’t really changed that much, as it’s still all a matter of bringing buyers and sellers together in a forum that allows them to easily do business, which is what stock markets are all about.

John Miller

Editor, MarketReview.com

John’s sensible advice on all matters related to personal finance will have you examining your own life and tweaking it to achieve your financial goals better.

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