What exactly is the stock market?
The stock market refers to public markets for issuing, purchasing, and selling stocks that trade on a stock exchange or over-the-counter.
Stocks, also known as equities, represent a company's fractional ownership, and the stock market is a marketplace where investors can buy and sell ownership of such investible assets.
A well-functioning stock market is considered critical to economic development because it allows companies to access capital from the general public quickly.
Stock Market Goals – Capital and Investment Income
The stock market serves two critical functions. The first is to provide capital to businesses to fund and expand their operations. Suppose a company issues one million shares of stock at a price of $10 per share.
In that case, it gains $10 million in the capital it can use to expand its business (minus whatever fees the company pays for an investment bank to manage the stock offering).
The company avoids incurring debt and paying interest charges on that debt by offering stock shares instead of borrowing the capital needed for expansion.
The secondary function of the stock market is to provide investors – those who buy stocks – with the opportunity to share in the profits of publicly traded companies. Investors can profit from stock purchases in two ways.
Some stores pay out dividends regularly (a given amount of money per share of stock someone owns). Another method for investors to profit from stock purchases is to sell their stock at a profit if the stock price rises above their purchase price.
For example, if an investor purchases shares of a company's stock at $10 per share and the stock price rises to $15 per share, the investor can sell their shares and realize a 50% profit on their investment.
Stock Trading History
Although stock trading dates back to the mid-1500s in Antwerp, modern stock trading is widely regarded as having begun with the trading of shares in the East India Company in London.
The Beginnings of Investment Trading
Throughout the 1600s, the British, French, and Dutch governments granted charters to some companies named East India Company.
All goods returned from the East were transported by sea, involving perilous journeys frequently threatened by severe storms and pirates. Shipowners sought out investors regularly to provide financing collateral for a voyage to mitigate these risks.
Investors received a portion of the monetary returns realized if the ship successfully returned, loaded with goods for sale. These are the earliest examples of limited liability companies (LLCs), and many of them lasted only one voyage.
The East India Company (EIC)
The formation of the East India Company in London eventually resulted in a new investment model, with importing companies offering stocks that essentially represented a fractional ownership interest in the company, and thus offering investors investment returns on proceeds from all voyages funded by the company, rather than just on a single trip.
The new business model allowed companies to request larger investments per share, allowing them to expand the size of their shipping fleets easily. Investing in such companies, which were frequently shielded from competition by royally-issued charters, became very popular due to the potential for massive profits on their investments.
The First Shares and the First Exchange
Company shares were issued on paper, allowing investors to trade shares with other investors, but regulated exchanges did not exist until the London Stock Exchange (LSE) was established in 1773.
Despite significant financial turmoil following the LSE's immediate establishment, exchange trading survived and grew throughout the 1800s.
The New York Stock Exchange's Beginnings
Enter the New York Stock Exchange (NYSE), founded in 1792. Though not the first stock exchange on American soil (that honour belongs to the Philadelphia Stock Exchange (PSE), the NYSE grew quickly to become the dominant stock exchange in the United States and eventually the world.
The NYSE was in a physically strategic location, nestled among some of the country's largest banks and corporations, not to mention a significant shipping port. At first, the exchange established share listing requirements and relatively high fees, allowing it to become a wealthy institution itself quickly.
The Changing Face of Global Exchanges in Modern Stock Trading
For more than two centuries, the NYSE faced little competition in the United States, and an expanding American economy primarily fueled its expansion.
The LSE continued to dominate the European stock market, but the NYSE became home to many large corporations.
Other major countries, such as France and Germany, eventually established their stock exchanges, though these were frequently viewed as stepping stones for companies seeking to list on the LSE or NYSE.
The late twentieth century saw the expansion of stock trading into many other exchanges, including the NASDAQ, which became a favourite home for burgeoning technology companies and grew in importance during the 1980s and 1990s technology sector boom.
The NASDAQ was the first exchange to operate as a network of computers that electronically executed trades. Trading has become more time- and cost-efficient as a result of electronic trading.
In addition to the NASDAQ's rise, the NYSE faced increased competition from stock exchanges in Australia and Hong Kong, Asia's financial centre.The NYSE eventually merged with Euronext, formed in 2000 by combining the exchanges in Brussels, Amsterdam, and Paris. In 2007, the NYSE/Euronext merger created the first trans-Atlantic exchange.