How Did Stocks Originate?

How Did Stocks Originate? The stock market gives companies access to the funds they need to open new locations, expand their workforces, and develop new products.

Whether you dabble in stocks or commit your professional life to managing investment portfolios, you might wonder where stocks came from. What’s the origin story behind stocks and the stock market? There’s an interesting history that goes all the way back to the 1600s.

The Dutch East India Company

The Dutch East India Company was formed in 1602 and had exclusive rights from the Netherlands government to trade with Asia. In 1611, it became the first company to sell shares to investors, who were eager to make money from trading products like spices, silk, tea, and grains.

The multinational corporation continued to grow until about 1730, when several factors started to undermine its profitability.

The Dutch East Asia Company became defunct on the last day of 1799, when the government dissolved and nationalized it. During the height of its activity, it had headquarters and outposts throughout Europe, Asia, and Southern Africa.

Several countries established similar trade companies, but few of them had nearly as much influence as the Dutch East India Company.

In fact, some of them rushed into operation so quickly that they caused a financial crisis that rocked Europe’s economy in 1720. It was perhaps the first lesson that successful investments come from good information instead of eager emotions.

The Philadelphia Stock Exchange

Formed in 1790 as the Board of Brokers of Philadelphia, the Philadelphia Stock Exchange is the oldest stock exchange in the United States. However, it has gone through a lot of changes over the years.

It merged with the Baltimore Stock Exchange in 1949 and the Washington Stock Exchange in 1954. It then had the unwieldy name “Philadelphia-Baltimore-Washington Stock Exchange.” It acquired the Pittsburgh Stock Exchange in 1969, but didn’t change its name.

NASDAQ purchased the exchange in 2007.

The Buttonwood Tree Agreement Starts the NYSE

The Buttonwood Tree Agreement is the New York Stock Exchange’s foundational document.

In the late 1700s, a group of 24 stockbrokers began meeting under a buttonwood tree to discuss ways they could found a stock exchange with reliable rules. At the time, they didn’t have a centralized way to trade stocks, which added a lot of chaos to their finances.

They named the agreement after the tree they met at, but they actually signed the document at the Corre’s Hotel on May 17, 1792. The agreement states that they would only trade with each other and establishes a 0.25% commission.

For years, the group conducted business at the coffeehouse of a NYSE “founding father.” More than 230 years later, the NYSE is the largest stock exchange in the world. It all started with two dozen businessmen getting together under a tree!

The Dow Jones Industrial Average

An unofficial version of the Dow Jones Industrial Average started in 1884 when journalist Charles Dow published his first stock average in the newspaper that would eventually become The Wall Street Journal.

His original stock market index included 12 prominent companies involved in transportation and industry. None of the original 12 are in today’s version of the Dow Jones.

Charles Dow and his business associate, statistician Edward Jones, launched the Dow Jones Industrial Average on May 26, 1896. Today, the price-weighted index contains 30 companies and has a market cap of $10.35 trillion.

The S&P 500

The S&P 500 stands out as one of the world’s most noteworthy capitalization-weighted index.

Henry Poor unknowingly started working on the index in 1860 when he began publishing an investors guide to the railroad industry.

In 1923, Poor started working with Standard Statistics Company to build an index and rate bonds. The original index contained 233 companies.

The number of companies in the S&P fluctuated over the decades. It expanded to 500 in 1957. Originally, the index was updated weekly. By 1986, the company had technology to update its index every 15 seconds.

Today, the S&P 500 has strict rules for which companies can join its index. This approach has made it possible for the index to beat the market more often than not.

The Depression

For the most part, investors were making a lot of money at the beginning of the 20th century. That ended abruptly in autumn of 1929.

In late October, an unbelievable sell off brought the market to its knees. The London Stock Market had already experienced a similar decline earlier in the year. The NYSE crash added fuel to the Great Recession.

Over just two days, the Dow Jones Industrial lost nearly 25% of its value. It lost more than 89% of its value over the next three years.

Nasdaq Stock Market

The National Association of Securities Dealers Automated Quotations (Nasdaq) stock market opened on February 8, 1971. It’s the second-largest stock market by market capitalization. NYSE is the largest.

Over time, the market released indices promising higher returns. Current Nasdaq indices include the Nasdaq Composite, Nasdaq-100, and NASDAQ Financial-100.

The Nasdaq Composite contains shares of nearly every company trading on the Nasdaq stock market.

Modern Stock Market Crashes

Modern stock market crashes include “Black Monday” in 1987. The crash affected markets around the world, including those in the United States, United Kingdom, New Zealand, Japan, and Hong Kong.

The 1987 crash encourages government agencies to impose regulations that would protect future markets. For example, exchanges could stop trading during tumultuous periods when stocks are losing significant amounts of money.

A market crash on September 29, 2008 solidified concerns that the global economy had entered a recession. The crash happened after the real estate bubble burst and worldwide economic decline.

Another market crash occurred on March 20, 2020. This rapid decline happened when the world realized that COVID-19 would damage the economy and threaten worldwide trade. Interestingly, the stock market rebounded quickly, not least because the U.S. government dedicated money to struggling businesses.

Is the Stock Market a Safe Way To Make Money?

Although the stock market has clearly experienced periods of tumult and extreme volatility, it has always historically bounced back.

Nonetheless, there is a big difference between investing in the stock market as a whole and investing in individual stocks.

Many stocks have simply never recovered from extreme volatility episodes, however the stock market as a whole has always rebounded over the long-term. 

While nothing is guaranteed, a bet on America is about as good a bet as anyone can make according to the Oracle of Omaha. If anyone is worth listening to it’s the most successful investor of all time.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.