In this article we will explore a brief history of the stock market, from it’s origins to it’s current place as America’s number one wealth creator. The East India Company is recognized as the world’s first publicly traded company. The East Indies were a major hub of riches and trade opportunities, merchants sailed there to trade and purchase exotic items that they could return home to sell. Unfortunately, few of these voyages ever made it home. What would usually happen is a merchant would have a great idea to travel to a far off land and purchase exotic items, however since he didn’t have enough money to do it alone, he would seek financing from wealthy individuals who sought to earn a return on their investment. If the ship sank or was taken by pirates the captain might lose his life and the financier would lose his total investment. The wealthy soon saw that it was better to spread their investments out over multiple ships to prevent losing everything, this however was extremely expensive and prevented everyone except the ultra wealthy from entering this business. As a result, a unique corporation was formed in 1600 called “Governor and Company of Merchants of London trading with the East Indies”. This was the famous East India Company and it was the first company to use a limited liability formula. Investors realized that putting all their “eggs into one basket” was not a smart way to approach investment in East Indies trading. This company sold shares in each of it’s ships to many people looking to spread out their risk and earn a profit. The formula proved to be very successful. Within a decade, similar charters had been granted to other businesses throughout England, France, Belgium, and the Netherlands. In 1602, the Dutch East India Company officially became the world’s first publicly traded company when it released shares of the company on the Amsterdam Stock Exchange. Stocks and bonds were issued to investors and each investor was entitled to a fixed percentage of the East India Company’s profits. Unfortunately an Indian uprising ended this company. London actually founded a stock exchange in 1801 but publicly traded companies weren’t legal until 1825 and by 1817 America founded what is still to this day the center of the world’s financial market.
The NYSE or the New York Stock Exchange founded in 1817 is today the biggest stock exchange in the world, however Contrary to what some people think, the NYSE wasn’t the first stock exchange in the United States. The Philadelphia Stock Exchange was actually the first in America but the NYSE soon became the most powerful stock exchange in the country due to the lack of any type of domestic competition and its positioning at the center of U.S. trade and economics in New York. The NYSE is presently located at 11 Wall Street in 1865.
The NYSE was founded 17 May 1792 when 24 stockbrokers signed the Buttonwood Agreement on Wall Street in New York City. Famously, they met beneath a Buttonwood tree and formed a centralized exchange for the rapidly growing securities market in the United States. The agreement eliminated the need for auctioneers who were used frequently for wheat, tobacco and other commodities and set a commission rate. The organisation made the Tontine Coffee House its headquarters and focused on government bonds. Twenty-five years later, on March 1817, the organisation officially became the New York Stock & Exchange Board, later simplified to the New York Stock Exchange. Throughout the early 1800s, the NYSE expanded beyond government bonds and bank stocks. Advances in telegraphic communication allowed buying and selling through the telegraph. Membership increased and became more exclusive. By the start of the Civil War, securities, commodities and gold, discovered in California, greatly increased participation in the exchange. When the stock market crashed on October 23 1929, causing an 89% drop in share prices, the federal government decided it was time to step in and regulate the stock market. The NYSE subsequently registered with the United States Securities and Exchange Commission. The Securities Act of 1933 required public corporations to register their stock sales and distribution and make regular financial disclosures. The Securities Exchange Act of 1934 created the SEC to regulate exchanges, brokers, and over-the-counter markets, as well as to monitor the required financial disclosures. In 1971, NASDAQ National Association of Securities Dealers, founded its own exchange, NASDAQ, which specialized in electronic trading and eventually became a U.S.-based rival to the NYSE. Today there are a little less than 4,000 publicly traded companies for investors to purchase share in. The stock market to this day still functions much the same way as the original East India company designed it’s business plan. The stock market allows companies to quickly raise money for investments and expansion, while at the same time allows the individual investor to participate in the profit of multiple companies to spread their risk across multiple ventures.
What exactly is a stock? A stock is a small piece of a publicly traded company, so when you purchase a stock you own a small piece of the company and are entitled to a piece of the profit they earn. In the old days investors would try to buy stocks of individual companies and diversify by spreading their purchases across several different sectors of the economy such as, energy, consumer goods, manufacturing, commodities, etc… then came along the mutual fund, which was a single fund, managed by a professional who charged a fee for his management services, these mutual funds provided instant diversification through spreading out their investing across different sectors as well as different investment vehicles. With all investments the best way to track their returns are not just of actual returns but their returns compared to the average of the market, which is basically a function of the national or international economy. If your investment did worse than the average of the market or of the average return of a particular segment then it was considered a dud, if it did better it was considered a good fund and the manager would be able to attract more investors and most likely justify a larger fee, the problem is that few managers beat the average market return and the ones that do usually cancel out the higher returns with the higher fees . Enter the Index Fund……. If you are even slightly involved in the F.I.R.E community, you are probably very familiar with what an Index Fund is, if you are new to the F.I.R.E community, an Index Fund is a fund that tracks a particular index or sector of the market. Two of the more popular within our community are the total stock market index, which tracks all the publicly traded companies and a fortune 500 index fund, which tracks the 500 largest companies based on revenue and market share. The investor gets two great things, instant diversification and a guarantee to get the average return of the market. This is why index funds have become so popular, they offer a great way to invest without requiring a fund manager or constant portfolio maintenance. The great thing about index funds is that they allow the market to do what it is supposed to do. self-cleanse itself by allowing the stronger companies to take market share from the weaker companies, if you owned individual shares, you run the risk of losing everything if the company goes out of business, however in an index fund the losing company is simply replaced by another company. This is great because the economy doesn’t stop demanding goods and services just because a company goes out of business and the employees of the shuttered company will simply find jobs at companies that can afford to pay them. People are what run the economy, they create the demand for good and services and also earn wages to produce them. All over the country people meet in rooms together to devise ways to increase revenues, raise profits, and expand the business, all of this is to provide returns to you the share holder. With an index fund you own a small piece of every company in that index, so essentially you have thousands of very smart men and women working hard to increase your net worth.
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