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History
of the Stock Market
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 speculator’s
market. In the speculator’s 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 company’s actual growth.
The
NYSE represented a more stable market in contrast to the
speculator’s 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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