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History of the Stock Market

Essay by   •  November 26, 2010  •  Research Paper  •  2,518 Words (11 Pages)  •  2,136 Views

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The financial markets of the United States, today, are collectively known as "Wall Street." These words represent the heart of the business and financial world in the United States today. Many of us conjure up well known images of companies being bought and sold, traders screaming out to get the best prices for their clients, fortunes won and lost many times over, and the billions of dollars exchanged in deals. Some may even claim that it is the "Crystal Ball" that can predict and control the economy. Wall Street actually does exist, physically, in New York City. It became the symbol of financial dealing from its own history of being the base of the large scale business dealings in Colonial America. Wall Street has also become the term that describes several stock exchanges and broker/dealer networks that have come into the computer age of finances. The street's location put it in the perfect position to become the base for the import and exports of the new colony.

Despite the fact that New York City was the temporary capital of the United States from 1785 to 1790, the first real stock exchange begun in Philadelphia, Pennsylvania in 1790. This was a simple finical market in which traders needed to have their offices close to the stock exchange so that messengers could keep the brokers up to date with current information. Many cities had their own finical markets because of how slow information traveled. The first major innovation of the Philadelphia Stock Exchange was a signal-system between Philadelphia and New York. This system brought news of current stock prices, lottery ticket information and other important news. The signal-system was a simple yet complex operation. The signal system started in Philadelphia with lines running along the mountains through New Jersey ending with a station hub in New York City. The stations consisted of a basic watch tower with telescopes, flags, and signal beacons to relay information from tower to tower. This was a vast improvement over the traditional message system of a horseback messenger. This signal system narrowed the advantage of New York speculators. After all, it is a fundamental axiom of free markets that can never be larger than the area in which information can be transmitted almost instantaneously.

In 1789, Alexander Hamilton, the first Secretary of the Treasury, recommended to Congress that bonds sold to finance the Revolutionary War should be backed by the fledgling federal government. These almost worthless-at-the-time bonds jumped in value when the government backed them up. Hamilton followed up on this strategy by selling stock to the public in the first national bank in America. It was from this modest beginning that Wall Street became the financial center of the United States; since the Congress was meeting on this very street, in New York. The trading of securities was rapidly becoming a business of its own and even began following a schedule for daily sales in 1792, when the first "Bull Market" was recorded. The appearance of brokers, who worked for a fee or commission, was also recorded in 1792. With the constantly rising value of the stocks and some securities, brokers actually formed partnerships. The Philadelphia Board of Brokers was the first officially licensed organization in 1790. These brokers were at the heart of the innovation of the Philadelphia Stock Exchange.

The New York Stock Exchange was born out of an agreement among twenty-four men to trade securities only among their membership to control commissions and transactions. This happened on May 17, 1792 under a large buttonwood tree that would give the agreement its name;" The Buttonwood Tree Agreement." The fledging exchange loosely organized had remained stable, but was not succeeding as planned. The members realized that the success of the Philadelphia Exchange was based on its organizational structure and principles or organization. William Lamb was sent on behalf of the New York Brokers to learn about the Philadelphia Exchange. In 1817, New York Brokers organized a constitution that was almost an exact copy of Philadelphia's Stock Exchange constitution. The organization was now called the New York Stock and Exchange Board or NYSE. Later in 1846, astonishing advancements in telecommunications technology enabled a new openness to the business of the stock market.

In 1844 Samuel Morse demonstrated the first successful telegraph line. Immediately a communications revolution knitted together the entire content of the United Sates. This technology revolutionized trading by allowing up to the minute information to be used in trading and selling of stocks from cities all across the US. By 1851, daily reports of transactions could be posted and distributed shortly after the close of the market. The first ticker was invented and introduced into trading in 1867. It remained in use until it was supplanted by the "black box" ticker which was replaced in 1957 by the 900 ticker which automated the market floor. The 900 ticker allowed traders on the floor to see current stock prices. Super DOT was introduced in 1984, this electronic routing system let traders make computer trades which increased the number of orders. Further more, the stock market was advanced in 1991 with off-hours trading which made the NYSE even more automated. Now the NYSE was the nation's finical heart, which overtook Philadelphia at the start of the canal boom. At the turn of the Millennium, the NYSE abandoned the long tradition of stock prices in fractions and converted to decimals. The NASDAQ Stock Market began in 1971 and became the world's first floorless exchange system. This was made possible by the internet, now brokers could monitor the market anywhere regardless of time or location. The NASDAQ is an open market or multiple-dealer system with many competitors competing to handle trades in each stock. The NYSE uses a specialist in which all brokers buy and sell. In other words the NYSE uses a broker for the brokers, or a middle-man. This slows the trading process down and can be costly for brokers. The NASDAQ revolutionized the modern stock market with advancements that were made possible by technology. Later in 1981 a vast computerized display system was on the trading floor so that traders could see current prices world wide.

Function of the Stock Market

The stock market has two major functions. The first function is to provide publicly traded companies a place to issue shares to people who want to invest in the company. For instance an oil company wants to expand its operations but the company does not have the assets available for the expansion. So the company issues shares to consumers to raise money for the expansion. Once the company becomes established it can

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