To start making any money in the stock market we first have to understand what a stock is and how it works. Going back to some of the first stock exchanges we have to travel back in time almost 400 years to the 1600s.
Back then many European countries would have ship voyages that traveled east across the ocean to acquire goods to bring back home. Think of the Pirates of the Caribbean movies when you’re thinking of these ships. The voyages turned out to be extremely risky because of:
- Bad Weather
- Navigation Issues
- Pirates (Jack Sparrow coming after the rum)
In order to mitigate these risks the countries needed to raise money to outfit the crew and ship to make the voyage as safe as possible. Investors, aka average people like you and I, would put up the money to fund the voyage and in return they would get a portion of the profits from the goods brought over IF the voyage was successful. Soon after the East India trading company (yes just like in the movie) took this a step further issuing paper certificates that represented ownership in the voyage and called them stocks.
If I wanted to invest, I would give a certain number of shillings and the East India trading company would give me these paper certificates. The key is that me buying this stock represented having ownership in the voyage. People soon began to trade these paper certificates on their own, even before seeing if the voyage was successful or not. If I paid 3 shillings for one certificate, why not try to sell them to someone else for a higher price? The supply and demand of these stock certificates drove the prices up and down. A majority of these trades occurred in local coffee shops. They negotiated buying and selling stocks while they all sipped their pumpkin spice lattes. Everyone was a winner.
Stock Exchanges in the U.S.
In the US the country’s first stock exchange was created in Philadelphia in I791 where people continued to buy and sell these paper stocks that represent ownership in voyages and businesses. The key to every one of these ventures is that they all issued stocks because they needed funding! And the general population was willing to give them money since they knew they could potentially getting back something in return.
The Birth of Wall Street
As time went on it become known that many people didn’t have the time or knowledge to trade these paper stocks but they still wanted some skin in the game. A savvy group of 24 guys decided to be clever and act as agents for these people and charge them commissions when they bought or sold stocks for them. You can think of it like a real estate agent selling your house. They do the grunt work for you to get it sold and make you money but you paid them a fee (commission) for doing so. These agents set up this exchange in New York in 1792 and did much of their trading under a tree at 68th Wall Street. In 1817 these agents decided to organize formally as the New York Stock and Exchange Board and in 1863 it adopted its present name as the New York Stock Exchange, NYSE
Birth of the Electronic Exchange
As the country and economy grew so did the popularity of these exchanges. Now you have to remember this was before everything became electronic and people were still handling all transactions on pieces of paper. When many people think of the stock market, the famous image comes to mind of a group of people at Wall Street screaming and aggressively waving their arms. For many years this is exactly what occurred. There was one podium or desk on the trading floor for each of the three thousand or so stocks. Traders would come in brightly colored jackets to designate what firm they worked for and would shout and use hand signals to negotiate on stocks prices. The part of the floor where trading took place was called the pit. The NYSE rose with America’s economy and became the world’s most important exchange until the NASDAQ opened in 1971. The Nasdaq is a network of computers that trade electronically and this was huge because up till that point the exchanges had to be in a physical location. The competition from NASDAQ forced the NYSE to evolve and it quickly became a hybrid exchange, trading both on the floor and electronically. Nowadays mostly all trading is done electronically and there is little-to-no use of floor trading. People still drive the prices of stocks in different directions based off of supply and demand but now it is all electronic. Trades occur in fractions of a second.
Check out my article The Fundamentals of Stock Investing to learn the basics of how to make money trading
- Stock Exchanges have been around for hundreds of years
- Stock represents ownership
- Stock exchanges were physical locations, now they are electronical
- Stocks are listed on an exchange, first sale to public is called IPO (initial public offering)
- Companies issue stocks to raise funding
Homework: Look up 3 stocks and begin to track their price movement from day to day. You can use sites such as Google finance, Yahoo finance, CNN Money, and Market Watch to look up this information