History of the Stock Market
The stock market can be a strong driver of a country’s economic growth. Private companies that go public can sell shares to both institutional and ordinary investors. Companies can then use the raised capital from selling stocks to fund new product launches or expand operations. Consequently, new jobs are created which in turn stimulates consumerism and more investments. The cycle continues and the country experiences significant economic expansion year over year.
Nowadays, stock markets have so much influence in our day-to-day living that its movement can alter history. Speaking of history, in this article, we explore the yesteryears and the significant events of the stock market.
Stock Market History Overview
Multiple sources have conflicting views on the origin of the stock market. Some say that the earliest bourse originated in 12th century France. Entities labelled as “courretiers de change” handled and oversaw agricultural communities debt under the service of French banks. Historians see this as the first example of a brokerage since the courretiers de change traded debts.
Nevertheless, the first market that resembled the stock market today began in the 1600’s. It was a time when European countries sailed east and explored the world. While monarchies funded some expeditions, many ship owners relied on investors to pay for boats and crews. In return, investors got a part of the expedition’s proceeds. This is how the first publicly traded company known as the Dutch East India was born.
The company sold bonds and shares to the general public. Every investor was entitled to a certain percentage of Dutch East India’s profits. There was demand for shares because the company had been granted monopoly on the Dutch spice trade. However, risk was still involved because pirates and bad weather could adversely affect profitability.
Factoring these risks, investors began trading shares in coffee shops. The coffee shops were not like the stock market that we have today but they were considered the original markets as investors frequented these places to purchase and sell shares. These shops would eventually give birth to the first stock exchange and stock market index.
First Stock Market
We can trace the history of the first stock exchange back to 1698. At that time, John Castaing organized the market in one coffee shop by listing the prices of stocks and commodities. This practice continued until the London Stock Exchange was established in 1801. This is why the UK stock market is considered by many as the oldest global stock market.
Today, the share market lists over 2,600 companies representing 60 countries and providing millions of people access to equity investment.
Top 5 Stock Market Crashes
While the stock market can generate tremendous wealth to investors, it can also bring powerful nations to its knees. Here are the top five stock market crashes in recent history.
- Stock Market Crash 1929
The 1929 stock market crash was fueled by greed. Before the collapse, people invested in equities not because of fundamentals but because of rising stock prices. Brokers exploited this sentiment by selling stocks on margin with a ratio of 1:3. This meant that an investor only needed to pay $1 for every $3 worth of stocks they bought. The downside of margin trading was that investor’s capital was wrecked if the invested stock lost a third of its value.
Margin trading drove higher prices which in turn attracted more investors. Eventually, the system could no longer sustain the ascent and prices began to drop. Panic ensued on October 29, 1929 as investors dumped shares in fear. Entire portfolios were wiped out as the New York Stock Exchange lost $14 billion in one day.
- 1987 Stock Market Crash
An amalgamation of global conditions led to the Dow Jones Industrial Average (DJIA) suffering the worst day in its history in terms of percentage loss. On October 19, 1987, also known as the black monday 1987, the Dow plunged by 22.6 percent. Experts point to various causes of the crash including a weakening US economy, plummeting oil prices, and the spat between the US and Iran.
- 1997 Asian Financial Crisis
In the summer of 1997, Thailand’s debt was rapidly spiraling out of control. Foreign investors took notice and lost confidence in the country’s currency. Capital outflow was also experienced in neighboring countries such as the Philippines, Malaysia, South Korea, and Indonesia as investors turned pessimistic. As a result, international stock markets nosedived by as much as 60 percent.
- Dot Com Bubble
In the late 1990s, people were over exuberant on the commercialization of the internet. Venture capitalists, as well as retail investors, threw money at internet-based companies (dot coms) regardless of their fundamentals. Almost everyone assumed that any company running online would turn a profit.
The overconfidence created a bubble that began to burst when tech companies Dell and Cisco dumped shares in large quantities. This triggered panic selling and within a few months, companies with market capitalization of millions of dollars lost all value. By 2002, the dot com bubble wiped out $5 trillion.
- 2008 Global Financial Crisis
What caused the stock market crash in 2008? In simple terms: greed. In technical terms: the deregulation of the financial industry.
The deregulation allowed banks to sell mortgages to hedge funds. Hedge funds then bundled these mortgages into securities and sold them to investors. Investors snatched these mortgage-backed securities as the perceived notion was that they virtually have no risk. These securities were insured by large companies such as the American International Group (AIG) under credit default swaps.
To supercharge profits, banks wanted to give out more mortgages regardless of a home buyer’s credit status. More mortgages meant more profits from selling to hedge funds. Hedge funds embraced more mortgages since they could sell more to investors. The cycle continued until almost all institutions such as pension funds, banks, and ordinary investors owned mortgage-backed securities.
The dominoes fell in July 2008 when the housing market started to decline in value due to oversupply. Homeowners who couldn’t meet mortgage payments found it difficult to sell their homes. When mortgage-holders failed to make payments, the housing market bubble burst. This ignited the banking crisis where large banks such as the Lehman Brothers filed for bankruptcy. The shockwaves of the crisis led to the stock market crash of 2008.
Black Swan Events
Black swan events in stock markets are events that happen outside the normal trading day. Usually, that’s when big downward swings in market prices occur. The market crashes mentioned above can also be considered black swan events. The financial crisis of 2008 is a perfect example of an unexpected outlier event that not many investors saw coming. Other noteworthy black swan events aside from the 5 market crashes listed above include:
- Black Monday China which occured on August 24, 2015.
- Brexit which is the decision of Britain leaving the European Union. This is still ongoing today and is affecting European markets.
- Terrorist attack on September 11, 2001 in New York (commonly called the crash of 9/11) where planes crashed into the Twin Towers. This caused the NYSE and Nasdaq to remain closed for a few days.
Top 10 Largest Stock Exchanges Today
Stock markets are resilient. They always bounce back after a crisis and offer those who lost their wealth a fresh start. Here are the ten largest exchanges today.
- New York Stock Exchange (NYSE)
The NYSE has a market capitalization of over $23 trillion as of March 2019 with over 2,400 listed companies. The New York Stock Exchange accounts for 40% of the total global market capitalization.
NASDAQ is the home of America’s largest tech companies including Apple (AAPL), Facebook (FB), and Amazon (AMZN). NASDAQ has a market capitalization of $11.22 trillion.
- Tokyo Stock Exchange (TSE)
- Shanghai Stock Exchange
In the Shanghai Stock Exchange there are two types of shares that investors can trade. The “A” shares are traded in the local currency and the “B” shares are traded in the US Dollar. As of March 2019, the stock exchange is valued at $5.01 trillion.
- Hong Kong Stock Exchange
The Hong Kong stock exchange has a value of $4.31 trillion with over 2,000 listed firms. Some of the largest companies listed in the exchange are HSBC Holdings, PetroChina, and China Mobile.
- Euronext Amsterdam Exchange
The Euronext is the primary pan-European exchange with over 1,300 listed companies and a total market capitalization of $4.27 trillion. Its reputable benchmark indices are the AEX, BEL 20, CAC 40, PSI 20, and the Euronext 100.
- London Stock Exchange
The London Stock Exchange (LSE) has a total market value of $3.97 trillion and has over 3,000 listed companies. Some of the biggest names trading in the exchange are the British Petroleum, GlaxoSmithKline, and Barclays.
- Shenzhen Stock Exchange
The Shenzhen stock exchange is the second independent market operating in China. Most companies listed on the exchange are local businesses that are priced in Yuan. It has a market capitalization of $3.36 trillion
- Toronto Stock Exchange (TSX)
The Toronto stock exchange is operated by the TMX group and has over 2,200 listed firms. The TSX has a total market cap of $2.22 trillion.
- Bombay Stock Exchange
The tenth largest stock exchange in the world is the Bombay stock exchange. It may be dead last on the list but in terms of listed companies it ranks the highest with over 5,700 listed firms. The Bombay stock exchange has a market capitalization of $2.18 trillion.
Other notable markets that didn’t make the cut are the Frankfurt Stock Exchange which ranks at number 12 and the Australian Securities Exchange which stands at 16.
Stock trading is a concept that’s over 400 years old. In that span of time, we’ve seen horrible crashes that altered the history of the modern world. Nevertheless, stock markets always recover. Just look at the trillion dollar valuations of the top ten exchanges in the world.