The stock market can feel like a vast and nebulous force that’s hard to comprehend. Yet, these markets had relatively humble beginnings in Western Europe in the 1600s.
From those beginnings to today, here’s what you need to understand about the history of the stock market and how you fit in.
What is a Stock Exchange
A stock exchange or stock market is a physical or digital place where investors can buy and sell stock, or shares, in publicly traded companies. The price of each share is driven by supply and demand.
The more people who want to buy shares, the higher the price goes. Less demand, and the price of a share drops. Stock markets now exist in most countries, but the first appeared in 17th century Amsterdam.
The Birth of Stock Trading
Though there were some proto exchanges dating back to the middle ages, the first modern stock trading has its birth on the high seas.
The Dutch East India Company was the first publicly-traded company and the first to be listed on an official stock exchange. The company sent expeditions to Asia to bring back trade goods to Europe.
Not all of these expeditions returned, which was a lot of risk for one entity to bear. So, the company would sell shares to investors to reduce any one person’s liability should the ship be seized by pirates or lost in a storm. This form of trade spread across Europe into France and Britain who gave charters to their own East India companies.
At this point, there were no stock exchanges. The first stocks were bought and sold on slips of paper inside coffee shops. In England, the success of the British East India Company was so great that other companies wanted in. The South Seas Company (SSC) received a charter from the king and started selling shares.
The sale of these shares made the SSC a fortune before their ships ever left the harbor. At this time, there was no government regulation and when these companies failed to pay dividends on their shares, the first stock bubble burst. As a result, the British government banned stock trading until 1825.
The First US Stock Exchange
Meanwhile, on the other side of the pond, America was getting into the game. The first stock exchange in the U.S. was formed in Philadelphia in 1790. This was two years before the New York Stock Exchange (NYSE), which would grow to be the Philadelphia exchange’s much larger cousin.
From the beginning, the NYSE made it’s home on Wall Street in lower Manhattan, first under a buttonwood tree and eventually in its current digs at 11 Wall Street.
Though other exchanges existed across the country, none rivaled the NYSE in size and power—that is, until 1971 and the creation of the Nasdaq.
Unlike the NYSE, which was a physical stock exchange, the Nasdaq allowed investors to buy and sell stocks on a network of computers, a system that was faster and more transparent than in-person trading.
The NYSE is still the largest stock exchange in the world. Yet, there are now exchanges in major cities across the globe trading domestic and international stocks.
You’ve likely heard of many of them, including the London and Tokyo Stock exchanges. The Euronext Stock exchange represents the European Union, and there are large exchanges in China, Australia, India and South Africa among others.
Stock Market Indexes
When you read about the stock market you may encounter names like the S&P 500 and the Dow Jones Industrial Average (DJIA). These are stock market indexes, which help describe the performance of a market as a whole or a specific piece of the market.
The S&P 500, for example, lists the 500 largest US publicly traded stocks. It’s a market-cap-weighted index so larger companies represent larger proportions of the index.
Founded in 1896 by Charles Dow and Edward Jones, the DJIA is a price-weighted average, meaning stocks influence the index in proportion to their price per share.
The DJIA keeps track of 30 large, publicly traded, US-based stocks. It was designed as a proxy for the overall economy. So, when you hear a news anchor say that markets were “up” or “down” on a given day they are likely referring to the DJIA.
What Are Market Cycles?
Speaking of markets being up or down, stocks and the market can fluctuate on any given day. The US stock market has historically gone through larger market cycles in which the market expands and shrinks over the course of weeks or even years.
There are typically four stages to a market cycle: accumulation, mark-up, distribution and the mark-down phase. The accumulation phase happens when a market is at a low and buyers begin to snap up stocks at discounted prices.
At the beginning of the mark-up phase prices have been stable for a while, and more buyers start jumping on the bandwagon driving up the price of stock.
At the end of this phase, as buyers jump in en masse, the market makes a final spike as it nears the top of a bubble. During the distribution phase sentiment becomes mixed, and in the mark-down phase, prices typically plunge.
So What Does All of This Mean for You?
As an investor, you can buy shares of companies that are traded on the stock exchanges through a stockbroker.
There are a number of metrics that you can use to help you determine whether a stock is a good fit for you.
For example, P/E, or the price to earnings ratio, takes a company’s total dollar value divided by its earnings, giving investors an idea of how relatively cheap or expensive a stock is.
Average return shows you how much stocks are likely to grow over time. And stock yield gives you a sense of how much you will receive in dividends compared with a stock’s price.
Some investors buy shares in mutual funds, index funds, or exchange traded funds, which hold bundles of stock rather than shares of one company. Because these funds hold many stocks, the risk to investors is decreased should the price of any one of them fall.
For the most part, investing in the stock market should be considered a long-term prospect. The longer you hold your stock, the more able you are to ride out the market’s natural periods of ups and downs.
Timing the stock market—trying to predict when stocks will rise and fall and buying according to those predictions—is generally not recommended for the average investor.
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