History of the Stock Market: How it All Started

With all of the mystery that surrounds the current stock market in the United States, one may be surprised to learn of its humble beginnings. The history of the Stock Market in the United States dates back to the mid 1700’s and was largely structured as a mirror to the London Stock Exchange which John Castaing is credited for organizing. Stocks had been used in Europe for the financing of voyages and companies for decades. Likewise, bonds had been used as a tool for the financing of government expenses. The US stock market first blossomed to help finance the war by selling war bonds to the public and other countries.

History of the Stock Market: Funding Private Banks and Companies

Soon after, private institutions such as banks began issuing shares of stock to the public to raise money. Five years after America achieved independence and adopted the constitution, twenty four of the largest merchants in the United States partnered to create the New York Stock Exchange. As time went on and the country continued to grow rapidly, the stock market boomed with the addition of millions of dollars of issued shares from expanding corporations. With the expanded market came speculators and entrepreneurs who created the secondary market which bet on the future of corporations and their shares values.

History of the Stock Market: Creation of Security and Exchange Commission

As the popularity of investing in US stocks permeated American culture and the world, the New York Stock Exchange, American Stock Exchange, and NASDAQ became solidified as the premier stock markets. As the markets developed, they added regulations to help protect investors and give an added sense of security to investors.

History of the Stock Market: The Booming 1920’s

The 1920’s brought a flood of novice investors into the stock market and led to an exponential rise in the overall value of the markets. The early 1920’s acted as a trust builder with the American populace as the market began to be viewed as less risky. In the mid 1920’s, stories of average people making significant sums of money littered the media and the market started to be seen as a way for the average man to get rich. As the stock prices rose, the associate risk with the markets diminished and the average household began investing in the markets. As the boom continued, larger portions of individuals portfolios were pushed into the market to get a piece of the ‘action’. By the late 1920’s, people were clabbering to get into the stock market. To help individuals who could not afford to buy stocks, the margin system was created. This system allowed individuals to put ten to twenty percent of their money down and borrow the rest.

History of the Stock Market: The First Major Crash

While markets did institute methods of investor protection and self regulation, this did not prevent the great stock market crash of 1929. On October 29th, 1929, the Dow lost over 12% of its value and would go on to lose 90% of its value by 1932 when the market bottomed out. While the crash of the stock market is commonly associated with the great depression, many expert economists point to the fact that under 20% of US households were invested in the market at the time of the crash to support the theory that it simply coincided with the burst of a credit inspired economic boom. This bust led to the failure of over four thousand lenders and banks and the worst economic depression in US history.

History of the Stock Market: The Securities and Exchange Act of 1934

To further protect investors and encourage investment, the United States government created the Security and Exchange Commission (now known as the SEC) with the passage of ‘The Securities and Exchange Act’ of 1934. The SEC became the central oversight for all of the US Stock Markets with this passage. The SEC oversees the issuance of shares and ensures that standard relevant information is made available for potential investors among other duties. However, despite the added regulations in the stock market as well as other areas of the economy, the depression continued through 1940.

History of the Stock Market: The Stable Years

The stock market (S&P reference) had stable returns in the 1940’s (8.22%), 1950’s (15.32%), and 1960’s (5.90%). The market had low returns in the 1970’s (2.12%), which is primarily attributed to the energy crisis in the United States. The 1980’s returned an impressive 9.59% real return despite dramatic fluctuation and a brief crash in 1987. The 1990’s once again saw an impressive boom with the internet bubble, leading to an impressive 15.16% real return.

History of the Stock Market: New Century Troubles

The 2000’s brought with it a host of problems ranging from the dot com bubble burst in 2001 to the real estate market collapse in 2008. The market has seen one of the most economic damaging times in US History. In 2002, nearly 50% of US Households owned stocks directly or indirectly compared to under 20% (16%) during the stock market crash of 1929. The large impact of the crash has led to a renewed rallying cry from the public to better regulate the stock markets in the United States. The crash coincided with the start of an economic depression closely linked with the credit market collapse of 2008 which continues today.