The Evolution of Stock Markets

The first phenomena resembling stock markets probably arose in thirteenth–fifteenth century Italy, when leading citizens of city-states like Venice, Florence, and Genoa were forced to pay a portion of the debt incurred by local governments and the Catholic Church in their efforts to provide for defense and the maintenance of trade routes. These shares of debt collected interest (a fee paid to someone who loans money to someone else), and because of this, the owners of shares could expect to make a profit. Shares in the public debt therefore acquired value, and the governing authorities allowed people to buy and sell these shares. The government and Church were providing people with a way to make money at the same time that those people were paying the institutions’ debts; thus, an effective way of financing large projects was discovered.

This model was later adopted by businesses who wanted to raise money for expansion and other pricey ventures. In 1602 the Dutch East India Company not only decided to sell stock in its company, it created for that purpose what is generally considered the world’s first continuously operating stock market, the Amsterdam Stock Exchange. Once the value of stocks in the Dutch East India Company became widely recognized, stockholders could use their shares as collateral for loans. (Collateral is any item or items of value that you offer as proof of your ability to repay a loan.) This gave rise to many of the financial intricacies of present-day stock trading, such as options and derivatives, which are essentially complex ways of buying stock, and accordingly to the specialized investors that characterize developed stock markets.

The forerunner to the New York Stock Exchange was created in 1792, when 24 brokers agreed to deal only with one another in the buying and selling of the U.S. government’s debt. The London Stock Exchange came into being in 1801 and became the world’s largest and most important stock market. It was instrumental in raising the capital necessary for England to defeat Napoleon, the French leader who attempted to conquer much of Europe in the early nineteenth century, and many countries attempted to copy the London exchange’s success. Stock markets appeared in most European capitals or other large cities. World War I (1914–17) brought about declines in the European stock markets, while the NYSE expanded in the following years. This growth slowed dramatically in 1929, when a stock market crash signaled the beginning of the Great Depression.

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