The History of Stocks and Stock Exchanges

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Podcast Transcript

A little over 400 years ago, a group of Dutch investors had a revolutionary idea. 

They were embarking on an incredibly risky endeavor, and to spread the risk, they were going to share ownership of the new venture. 

Even better, each part of the ownership in this venture could be bought and sold to other investors.

Their innovation is one of the most powerful economic forces in the world today.

Learn more about stocks and stock exchanges, how they were formed, and how they work on this episode of Everything Everywhere Daily.

Most of you are familiar at some level with stocks and stock exchanges. I’d bet that many of you own stock in some corporation, whether directly, via a mutual fund, retirement account, or maybe in a small business where you are the sole proprietor. 

Stocks and shares are actually different but very closely related concepts. 

Stock is the ownership of the company. When a company sells stock, they are selling partial ownership. An individual or another company can then buy shares of stock. So, technically, you don’t buy stock, just shares of stock. 

These shares, depending on the company and the country, can be bought and sold depending on the market price. The place where shares of stock are bought and sold is known as a stock exchange. 

To understand the origin of stocks, we first need to understand the origin of corporations.

Corporations as we know them today are relatively modern concepts. 

The origin of the corporation dates back to Ancient Rome. However, it was nothing like a modern corporation. 

The word “corporation” derives from the Latin word “corpus,” which means “body,” in particular, in this case, to a “body of people”.  

There were several different terms for organized groups in Rome, including Universitas, corpus, or collegium. 

These could represent a wide variety of groups, including burial groups, religious groups, social clubs, and merchant guilds. 

Some collegia during the end of the Republican period actually turned into violent gangs, and during the region of Julius Caesar, collegia had to be approved by the Senate, giving them legal authority. 

Similar to modern corporations, these collegia had their own legal rights. They could own property, have their own treasury, and could enter contracts. Where they differed was in their ownership structure. Because they covered such a wide range of types of organizations, they were more akin to coops or non-profits. 

The idea of an organization that could act with its own rights was revived in the Middle Ages. The idea of a corporation at this time was not necessarily about making money or even commerce. Many municipalities and churches were incorporated. 

The idea was to create an organization that would survive its members. The organization would survive in perpetuity. It wasn’t an issue of ownership or profit so much as it was creating a legal framework and a set of rules for a group of people. These corporations also didn’t necessarily issue shares of stock.

The City of London Corporation was established in the 12th century. 

One of the oldest corporations in the world is the Stora Kopparberg copper mining company in Falun, Sweden, which was established in 1347. 

There are companies in Japan that date back much earlier, but they were family-run institutions, not corporations with a separate legal existence. The Kong? Gumi construction company in Japan dates back to the year 578.

There were types of corporations in the Tang and Song Dynasties in China known as a heben. These proto-companies had multiple investors who all received a share of the enterprise’s profits.

Around the same time that institutions were incorporating in Europe in the Middle Ages, something else was happening. 

Markets began to develop for the buying and selling of debt. The idea of debt, which will definitely be a future episode, dates back as far as writing. Hammurabi’s Code deals with debt. 

These debt markers were established in Venice in the 14th century. Brokers with a list of all the debts available would try to match buyers and sellers. They also eventually got into the business of buying and selling government debt. 

These were the first brokers, men who brokered deals between buyers and sellers. 

The real innovation in creating modern corporations and stock ownership took place in the Netherlands in 1602. 

The Dutch government granted a charter to the Dutch East India Company. The charter granted the company a 21-year monopoly on all trade in Asia.  

The charter and the monopoly on trade were not the groundbreaking aspects of this company. What was game-changing was that the Dutch East India Company was founded as a special type of joint stock corporation.

The company was not a partnership or a cooperative. Shares of ownership in the company could be purchased by any citizen of the Dutch Republic and then sold on a secondary market. Ownership in the company and the distribution of profits was proportional to the number of shares someone held. 

The company had two different classes of stock. The participanten who were the non-managers of the company, and the 76 bewindhebbers who were the managers. All of the shareholders, including the bewindhebbers, had their liability limited to what they paid. 

Previously, in any such commercial venture, the bewindhebbers would have had unlimited liability and were liable to lose everything. 

Also, the Dutch East India Company was an ongoing affair. Previously, investors would come together for a single voyage, from which they would share the profits and risk. 

The issuing of shares of stock in the Dutch East India Company quickly led to the establishment of the Amsterdam Stock Exchange just months later. It was the world’s first stock exchange.  

To be sure, it wasn’t much of a stock exchange insofar as there was only one stock that was traded, but it was the first time the shares of a corporation were openly traded in a public market. 

The organization of the Dutch East India Company proved to be a huge success, and it was soon copied in other countries. Other joint stock companies, such as the British East India Company, eventually had their shares publicly traded. 

One area where ventures were perceived to be risky was North America. Many of the early colonies that were established were set up as joint stock companies. As such, these joint stock companies were quite natural to people who lived in the American colonies. 

In particular, the Dutch West India Company, which founded New York City, was another company organized on principles similar to those of the Dutch East India Company. 

By the 18th century, trading shares of stocks had become commonplace in New York. However, it was highly informal. Traders would often meet at a buttonwood tree in the city where they could meet each other to buy and sell stocks.

In March 1792, they met to address the problem that stock trading had become too disorderly and chaotic. After weeks of negotiations, on May 17, 1792, they signed what became known as the Buttonwood Agreement. 

The main part of the agreement read as follows:

We the Subscribers, Brokers for the Purchase and Sale of the Public Stock, do hereby solemnly promise and pledge ourselves to each other, that we will not buy or sell from this day for any person whatsoever, any kind of Public Stock, at a less rate than one quarter percent Commission on the Specie value and that we will give preference to each other in our Negotiations. In Testimony whereof we have set our hands this 17th day of May at New York, 1792.

This agreement became the basis of the New York Stock Exchange. 

The 19th century saw an increased need to raise large sums of capital. Railways, mining, and manufacturing were far larger enterprises than those that came before. They required the amounts of capital that could only be raised in public markets. 

In the UK, the Limited Liability Act of 1855 and the Joint Stock Companies Act of 1856 laid the legal foundation for how publicly traded companies would be structured. 

The New York Stock Exchange was trading over 300 stocks and bonds by the ended of the Civil War and moved into its current location in 1865. 

Over time, the stock exchanges became larger and busier. More stocks were being traded, which meant more traders. The physical act of trading stocks became extremely frantic, loud, and specialized.

The exchanges were open floors with hundreds of traders shouting at each other, trying to buy and sell thousands of different stocks. Hand signals, color-coated jackets, and a host of other systems were developed to make trades happen in the middle of chaos. 

A major moment in the history of stocks and stock trading took place on October 24, 1929, a day known as Black Thursday, when the New York Stock Exchange lost half its value in a single day. 

The collapse of the American stock market precipitated declines in stock markets all over the world. 

In the US, it also resulted in major regulatory reforms, including the U.S. Securities Act of 1933 and the Securities Exchange Act of 1934. 

Stock trading is fundamentally about information. Throughout the 20th century, information technology continued to improve, and these technologies were incorporated into stock trading. 

In the 1970s, video monitors showing stock data were added to the floor of the New York Stock Exchange for the first time. 

Perhaps more importantly, in 1971, the National Association of Securities Dealers opened up a new electronic stock exchange known as the National Association of Securities Dealers Automated Quotations, or NASDAQ. 

NASDAQ had no hectic trading floor. Everything was done on computer terminals. 

For years, NASDAQ was a very small exchange, however, in the 1980s and ’90s, many technology firms that had become publicly traded opted to list their stocks on the NASDAQ exchange because it was cheaper. 

It has grown to a point where it now rivals the New York Stock Exchange for the value of its listed stocks. 

The New York Stock Exchange has computerized most of its systems, but it still has a trading floor even though it really isn’t necessary. In 2020, during the pandemic, they switched to completely electronic trading for several weeks. 

With the rise in popularity of the internet, stock trading moved from exclusively brokers to consumers. Average investors were now able to place stock trades directly from their computers and even their smartphones. 

In addition to technical changes, there have also been changes to the products which are available. In addition to individual stocks, it became possible to buy mutual funds, which were collections of stocks purchased by a fund manager, index funds, which are reflections of an index like the Down Jones, exchange-traded funds or ETFs, which are bundles of assets that can be traded like a stock, and derivatives, a financial contract that derives its value from an underlying asset, group of assets.

I should note that as stocks go up in price, companies will sometimes split their stock to make the price more reasonable. The average stock will usually sell in the ranges of tens or a few hundred dollars per share. 

However, some companies have never split their stock, resulting in extreme prices for a single share. As of the day I am recording this, the record for the price of a single share of stock is for Berkshire Hathaway Class-A, which currently sells for 618,133.66 per share. 

Stocks and the exchanges they are traded on have become integral parts of the global economy. Not only are they vital sources of capital for companies, but they are the pillar of investments and retirement funds for millions of people….and it started with Dutch stock traders trading a single stock over 400 years ago in Amsterdam.

The Executive Producer of Everything Everywhere Daily is Charles Daniel. 

The associate producers are Benji Long and Cameron Kieffer. 

Today’s review comes from listener  I| Dnd Goblin I|  over on Spotify. They write:

Hello, Just recently finished listening to all the episodes hopefully I’ll be the first Estonian member. Could you also make an episode or two on the baltics?

Hopefully, you’ll read this. Jasper

Thanks, Jasper! There will certainly be episodes on the Baltis in the future. I had the pleasure of visiting all three Baltic countries a few years ago and also got to visit Saaremaa and Tallinn in Estonia. 

Remember that if you leave a review or send me a boostagram, you too can have it read on the show.