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A Brief History of the Stock Market

January 08, 2021 · 7 minute read

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A Brief History of the Stock Market

The stock market can feel like a vast, nebulous force that’s difficult to comprehend. Yet these markets had humble beginnings in Western Europe in the 1600s. From then to now, here’s what you need to understand about the history of the stock market.

The Idea of a Stock Market

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 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.

Stock Market Timeline

Here is a timeline of major events in the stock market’s history:

•  Late 1400s: Antwerp, or modern day Belgium, becomes the center of international trade. Merchants buy goods anticipating that prices will rise in order to net them a profit. Some bond trading also occurs.
•  1611: The first modern stock trading is created in Amsterdam. The Dutch East India Company is the first publicly traded company, and for many years, it is the only company with trading activity on the exchange.
•  Late 1700s: A small group of merchants made the Buttonwood Tree Agreement. The men meet daily to buy and sell stocks and bonds, a practice that eventually comes to form the New York Stock Exchange.
•  1790: The Philadelphia Stock Exchange is formed, helping spur the development of the U.S.’s financial sectors and the country’s expansion west.
•  1896: The Dow Jones Industrial Average is created. It initially has 12 components that were mainly industrial companies.
•  1923: The early version of the S&P 500 is created by Henry Barnum Poor’s company, Poor’s Publishing. It begins by tracking 90 stocks in 1926.
•  1929: The U.S. stock market crashes after the decade-long “Roaring 20s,” when speculators made leveraged bets on the stock market, inflating prices.
•  1941: Standard & Poor’s is founded when Poor’s Publishing merges with Standard Statistics.
•  1971: Trading begins on another U.S. stock exchange, the National Association of Securities Dealers Automated Quotations, otherwise known as the NASDAQ.
•  1987: Corporate buyouts and portfolio insurance helped prices in the market run up until Oct. 19, what becomes known as “Black Monday.”
•  2008: The stock market crashes after the boom and bust of the housing market, along with the proliferation of mortgage-backed securities in the financial sector.

Where Were Stocks First Created?

The idea of trading goods dates back to the earliest civilizations. Early businesses would combine their funds to take ships across the sea to other countries. These transactions were either implemented by trading groups or individuals for thousands of years.

Throughout the Middle Ages, merchants assembled in the middle of a town to exchange and trade goods from countries worldwide. Since these merchants were from different countries, it was necessary to establish a money exchange, so trading transactions were fair.

Antwerp or Belgium today, became the center for international trade by the end of the 1400s. It’s thought that some merchants would buy goods at a specific price anticipating the price would rise so they could make a profit.

For people who needed to borrow funds, wealthy merchants would lend money at high rates. These merchants would then sell the bonds backed by these loans and pay interest to the other people who purchased them.

Who Invented the Stock Market?

The first modern stock trading was created in Amsterdam when the Dutch East India Company was the first publicly traded company. To raise capital, the company decided to sell stock and pay dividends of the shares to investors. Then in 1611, the Amsterdam stock exchange was created. For many years, the only trading activity on the exchange was trading shares of the Dutch East India Company.

At this point, other countries began creating similar companies, and buying shares of stock was all the rage for investors. The excitement blinded most investors and they bought into any company that began available without investigating the organization. This resulted in financial instability, and eventually in 1720, investors became fearful and tried to sell all their shares in a hurry. No one was buying however, so the market crashed.

Another financial scandal followed in England shortly after— the South Sea Bubble. But even though the idea of a market crash concerned investors, they became accustomed to the idea of trading stocks.

When Did the U.S. Stock Market Start?

Although the first stock market began in Amsterdam in 1611, America didn’t get into the stock market game until the late 1700s. It was then that a small group of merchants made the Buttonwood Tree Agreement. This group of men met daily to buy and sell stocks and bonds, which became the origin of what we know today as the New York Stock Exchange (NYSE).

Although the Buttonwood traders are considered the inventors of the largest stock exchange in America, the Philadelphia Stock Exchange was America’s first stock exchange. Founded in 1790, the Philadelphia Stock Exchange had a profound impact on the city’s place in the global economy, including helping spur the development of the U.S.’s financial sectors and its expansion west.

In 1971, trading began on another stock exchange in America, the National Association of Securities Dealers Automated Quotations or otherwise known as the NASDAQ. In 1992, it joined forces with the International Stock Exchange based in London. This linkage became the first intercontinental securities market.

Unlike the NYSE, a physical stock exchange, the Nasdaq allowed investors to buy and sell stocks on a network of computers, as opposed to in-person trading. In addition to the NYSE and the NASDAQ, investors were able to buy and sell stocks on the American Stock Exchange or other regional exchanges such as the ones in Boston, Philadelphia, and San Francisco.

How Was The U.S. Stock Market Created?

The New York Stock Exchange took centuries to become what it is today. In 1817, the Buttonwood traders observed and visited the Philadelphia Merchants Exchange to mimic their exchange model, creating the New York Stock and Exchange Board.

The members had a dress code and had to gain a seat in the exchange. They also had to pay a fee, which increased from $25 to $100 by 1837.

After the Great Fire of 1835 wiped out 700 buildings in lower Manhattan, Wall Street suffered a significant property loss. Fortunately, Samuel Morse opened a telegraph demonstration office, which allowed brokerages to communicate remotely.

In 1903, the doors of NYSE opened with hundreds of stock certificates held underground in vaults.

The stock market surged and hit a 50% high in 1928 despite indications of an economic downturn. In 1929, the market dropped 11% in an event known as Black Thursday. The drop in the market causes investors to panic, and it took all of the 1930s to recover from the crash. This period is known as the Great Depression.

Since then, the market has experienced several other crashes, notably the subprime mortgage crash in 2008.

Although the NYSE was created by a few merchants centuries ago, many investors, exchange executives, companies, and regulators have contributed to its growth and what it is today.

World Exchanges

The NYSE is the largest stock exchange in the world. Yet, there are now exchanges in major cities across the globe trading domestic and international stocks.

These include the London and Tokyo Stock exchanges. Some of the other world’s largest exchanges are located in China, India, Canada, Germany, France and South Korea.

History of Stock Market Indexes

Reading about the stock market, you encounter names like the Dow Jones Industrial Average and the S&P 500 Index. These are two of the stock market’s most famous benchmarks, or barometers that try to capture the performance of the whole market and even the whole economy.

Founded in 1896 by Charles Dow and Edward Jones, the Dow is a price-weighted average. That means stocks with higher price-per-share levels influence the index more than those with lower prices. The Dow is made up of 30 large, U.S.-based stocks. It was designed as a proxy for the overall economy.

The Dow’s 12 initial components were mainly industrial companies, such as producers of gas, sugar, tobacco, oil, as well as railroad operators. It has since gone through many changes and now includes technology, healthcare, financial and consumer companies. General Electric was one of the original Dow members. Meanwhile, Procter & Gamble was added in 1932 and remains in the benchmark today.

Meanwhile, the S&P 500 was created in 1923 by Henry Barnum Poor’s company, Poor’s Publishing. It began by tracking 90 stocks in 1926. Standard & Poor’s was founded in 1941, when the company merged with Standard Statistics.

Today, the S&P 500 is a market-cap-weighted index, meaning companies whose market value is larger have a bigger influence. Market value or market cap is calculated by multiplying the price-per-share by the number of shares outstanding. More so than the Dow or other gauges like the Russell 2000 Index, the S&P 500 has become synonymous among investors with the stock market.

What are the Stock Market Cycles?

Speaking of markets being up or down, stocks and the market can fluctuate on any given day. The U.S. 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.

Here are some of the most famous U.S. stock market cycles:

1. During the decade-long “Roaring 20s,” speculators made leveraged bets on the stock market, inflating prices. The rise in share prices was followed by the stock market crash of 1929. Share prices took years to recover.
2. Corporate buyouts and portfolio insurance helped prices in the market run up until Oct. 19, 1987–what became known as “Black Monday” among stock traders and investors. Panic selling, along with computerized trading, caused the Dow to fall 23% in a single day.
3. Investors flocked to technology stocks during the Internet boom of the late 1990s and early 2000s. However, some of these companies weren’t profitable and didn’t have promising business models, causing the bubble to burst until 2002.
4. A rapidly growing housing market, along with the proliferation of mortgage-backed securities in the financial sector, helped cause years of stock market gains from the early 2000s to 2008. The market then crashed, leading to a deep recession. Shares didn’t start to recover until March 2009.

The Takeaway

It took centuries to create the modern day stock market that exists, and exchanges continue to constantly evolve.

Today, both institutional and retail investors can buy shares of companies that are traded on the stock exchanges through a stockbroker. They can also buy shares of exchange traded funds, which hold bundles of stock rather than shares of one company.

Keep up with the stock market by downloading SoFi’s app today.

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