The stock market system dates back more than 200 years. It started in colonial times when the colonial government used bonds and government notes in order the finance the war. These government bonds and notes were sold to the colonial people with the government promising that they would pay them back at a later date with a profit. Banks that were privately owned started to use a similar system. The banking industry began to raise money by selling shares of stocks of the bank in order to raise money for the bank. The rich started to use this new system began to become even more wealthy. By 1792, there were many more banks and individual companies involved in trading stocks. Also in 1792 twenty-four large merchants held a meeting in the New York area. These large merchants agreed to meet everyday on Wall Street to trade stocks and bonds from banks, individual companies and the government. This meeting of the merchants created a market that was later called the New York Stock Exchange.
From 1750 to 1900 the Industrial Revolution played a role in helping the stock market develop. New forms of investing started to emerge. Reselling of shares of stocks to others who wanted to own part of a company soon became very popular. This eventually created the beginning of a new market, which was the speculator’s market. In this new speculator’s market, a speculator could purchase large number of shares of stock in individual companies that they thought would grow. Once the company grew and the shares of that stock were in demand, the speculator would sell the shares of stock for the new higher price. This created a very volatile market which ran on speculation of growth, rather than a company’s growth.
The market that was created by the merchant’s represented a more stable market as compared to the speculator’s market. This merchant market traded established companies and was a safer place for investors to place their money.
During the mid-1800s, the United States was expanding West at a very fast pace. Companies needed additional funds to meet the demands of the quickly developing nation. Companies realized that investors would be interested in owning parts of the company and buying shares of stock. As a result, many companies made their stock public in order to keep up with demand, which allowed them to keep expanding into the West.
By the 1900’s, there was millions of dollars worth of stock traded in the stock market. The stock market thrived and experienced a major bull market in the 1920s until the fateful stock market crash of 1929. On October 29th, 1929, otherwise known as Black Tuesday, the NYSE experienced a record 12 percent loss. By the end of the following month, investors lost $100 billion in assets. This marked the start of the Great Depression and end of a bull market. In July of 1932 the market finally bottomed out.
In 1934, the government stepped in and decided that regulations on the stock market were needed to protect investors. Congress passed the Securities and Exchange Acts. This act formed the Securities and Exchange Commission (SEC), which regulates trading in the American stock market. It also oversees the companies that issue shares of stocks for investors and in turn, oversees everyone who invests and provides companies with relevant information about the investors. The SEC also oversees the day to day actions of the stock market and exchanges.
With these new regulations, the stock market changed from something that only the rich did to a good investment opportunity for the average person. The rules and protection made it possible for the average person to make safer investments. People were beginning to see the value of stocks as compared to other investments such as houses or land.
For many years, the NYSE was the most stable and largest market in the United States. Currently there are many new markets that have appeared. The American Stock Exchange (AMEX) and NASDAQ are two of the largest newer markets in this ever evolving system.
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