April 21: Stock Market History

by David Jenyns on April 21, 2007

The stock market system is almost as old as the United States itself. The system dates back more than 200 years to colonial times. The colonial government used a system of bonds and government notes in order the finance the war. These government bonds were sold to the colonials with a promise that the government would pay them pack at a later date with a profit. At the same time, private banks began to use a similar system. The banking industry began to raise money by selling stocks (or shares) of the bank in order to raise money for the bank. The new system began being used by the rich to become even richer. By 1792, there were many banks and companies involved in trading stocks. In this year, there was a meeting between twenty-four large merchants in the New York area. These merchants agreed to meet daily on Wall Street to trade stocks and bonds from banks, companies and the government. This meeting created a market that came to be called the New York Stock Exchange.

The Industrial Revolution (lasting from approximately 1750 to 1900 in the United States and United Kingdom) also played a role in helping the stock market develop. New forms of investing began to emerge. The most common new method was the re-selling of stock to others who wanted to own part of a company. This marked the beginning of a secondary market, which was the speculatorís market. In the speculatorís market, a speculator would purchase large amounts of stock in a company that was predicted to grow large. Once the company grew and the stock was in demand, the speculator would sell the stock for much, much more than he paid for it. This created a more volatile stock market which ran on highly subjective speculation of growth, rather than a companyís actual growth.

The NYSE represented a more stable market in contrast to the speculatorís market. This market only traded with well-established companies and acted as a safer place for unsure investors to place their money.

By the mid-1800s, the United States was growing rapidly and expanding into the seemingly endless West. Many companies required funds to grow and meet the new demands of the quickly developing nation. They realized that many investors would be interested in owning parts of the company and buying stock. Since history had already proven that stocks facilitated the growth of companies, many companies in the 1800s made their stocks public. The result was rapid growth in wealth for these companies that helped fund the expansion into the West.

By the turn of the 20th century, there was millions of dollars worth of stock traded in the stock market. The stock market thrived and experienced a major boom (or bull market) throughout the 1920s until the fateful stock market crash of 1929. On Black Tuesday, October 29th, 1929 the NYSE experienced a record 12 percent loss. By the end of the following month, investors lost $100 billion in assets. It marked the end of a bull market and the start of the Great Depression. The market eventually bottomed out in July of 1932.

In 1934, the government decided that regulations on the stock market were necessary in order to protect investors. In this year, Congress passed the Securities and Exchange Acts. This act formed a government body called the Securities and Exchange Commission (SEC), which regulates the American stock market trading. It oversees the companies that issue stock shares for investors and in turn, oversees those who invest and provides companies with relevant information about the potential investors. The SEC also manages the daily actions of the stock market and exchanges.

With these regulations, the stock market and NYSE changed from being a hobby of the rich. The rules and protection made it possible for the average person to make safer investments. More people began to see the value of stocks, in comparison to traditional investments such as land or houses.

For years, the NYSE was the largest and most stable stock market in the United States. Today, there are several markets, such as the American Stock Exchange (AMEX) and NASDAQ, which contribute to the national and global economy.

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