The Evolution of the Stock Exchange
Stock exchanges play a vital role in today's free-market economies. They facilitate capital transfers from less productive to more productive companies, providing resources for growing industries and contributing to the overall growth of the economy. However, stock exchanges have not always been what they are today, and their modern state is a product of a 500-year evolution.
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Origins
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Stock exchanges take their origins from Renaissance bankers. In the 14th century, the Venetians developed fairly sophisticated systems of securities exchange, allowing traders to buy and sell government and business debt obligations. However, it wasn't until 1531 that the first stock exchange was founded in Antwerp, Belgium. It traded a wide variety of promissory notes and bonds and other instruments, although no actual stocks changed hands.
Evolution
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Th first joint-stock companies appeared as a result of sea expeditions of the 17th century, particularly to the East Indies. Long sea voyages from Europe to far-away countries in search of spices and other valuable products were extremely lucrative enterprises. However, they were also very risky because of changeable weather, poor sea navigation and occasional pirate attacks.
The investors who provided funds for such expeditions wanted to spread their risk by investing in a number of expeditions rather than sponsoring just one voyage. As a response, the first joint-stock companies were formed, giving investors an opportunity to buy individual stocks that paid out dividends from the proceeds an expedition would bring.
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Early Exchanges
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As the first joint-stock companies were formed, a need emerged to have a place where investors could trade stocks. In most cities, particularly London, England, trades took place in coffee shops. The famous London Stock Exchange takes its origin from a 17th century coffee house.
Regulation
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The increase in commerce during the 17th and early 18th centuries contributed to a great rise in popularity of stock exchanges. However, the trade was not regulated. This ended when the South Sea Bubble, a result of an unsuccessful investment scheme designed to bring great returns from trade with South America, burst in 1720. Share prices of the South Sea Company tumbled as spectacularly as they had risen, wiping out shareholders and causing havoc in the financial markets. In response, governments began regulating markets.
Modern Exchanges
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Stock exchanges grew more prominent in the 18th and 19th centuries as a result of the increase in wealth generated by industrialization in Europe and America. The New York Stock Exchange, currently the biggest stock exchange in the world, became the center of, first American, and then the world's financial system.
Liberalization of the financial industry in the 1980s and the Internet Revolution of the 1990s made global electronic transactions possible, greatly increasing stock market value and liquidity. Today, stock exchanges are an extremely important market institution and the lifeblood of a globalized financial system.
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References
- Photo Credit stock exchange image by Christopher Walker from Fotolia.com
