Stock markets and corporate stocks
Stock markets are platforms where shares of publicly traded companies, known as corporate stocks, are bought and sold. The concept of stock markets began in the United States in the early 1800s, evolving from informal trading to organized exchanges, with the New York Stock Exchange (NYSE) becoming a key player. Initially, these markets facilitated the trading of "seasoned" securities, allowing investors to buy and sell shares that had already been issued. Over time, significant developments such as the introduction of the telegraph and the specialist system transformed trading practices, enhancing market efficiency.
The early 20th century saw substantial growth in stock ownership, driven by speculation and the rise of mutual funds. However, this culminated in the 1929 stock market crash, which coincided with the Great Depression and prompted regulatory reforms, including the establishment of the Securities and Exchange Commission (SEC) to oversee market practices and promote transparency. Stock markets experienced further fluctuations, notably during the financial crisis of 2007-2008, which impacted global markets and led to significant declines in stock prices. Today, stock markets continue to evolve, influenced by technological advancements and changes in trading behaviors, with a growing proportion of stocks held by institutional investors.
Stock markets and corporate stocks
Definition Institutions that coordinate the exchange between investors of shares in publically traded businesses
Stock markets facilitate buying and selling corporate stocks, provide continuous stock price quotations, and make available a way for the market to control corporations.
The first stock market in the United States was formed in Philadelphia in 1800. Speculators traded the many types of state and national government securities and stocks in banks and insurance companies. The New York Stock and Exchange Board was formed in 1817, evolving from a 1792 agreement among prominent traders. From the beginning, the stock markets were secondary markets, trading in “seasoned” securities—shares that had already been issued and purchased from the companies themselves and were now being traded among investors. The actual trading was conducted by brokers, often acting as agents for the investors and charging them a commission.
From the 1830’s, railroads became the first truly big business corporations, and their stocks became a major focus of stock market trading. Exchanges were formed in other major cities; the San Francisco Stock and Exchange Board, founded 1862, specialized in gold mine shares and ranked second to New York. After the invention of the telegraph in 1844, the stock “ticker” came into wide use. Stock price quotations could be transmitted nationwide in a few seconds.
Initially, exchange trading proceeded by auction. At the same time, many trades were made directly, often outdoors in the “curb” market. By 1864, New York’s Open Board of Stock Brokers had developed the “specialist” system. The specialist was a broker-dealer who specialized in a few stocks and stood ready to buy or sell at any time at a quoted price.
Post-Civil War Developments
The modern New York Stock Exchange (NYSE) was formed in 1869. It incorporated the specialist system and maintained relatively strict standards regarding which companies were traded (most were not) and which individuals could become members. A major New York rival was the Consolidated Stock and Petroleum Exchange, formed in 1885.
The post-Civil War period witnessed scandals involving stock speculators such as Jay Gould, Daniel Drew, and James Fisk. Ownership of stock brought the power to control a corporation, to issue new stock for cash, and pocket the money. Defenders argued that speculation helped provide “liquidity”—that is, investors could sell their shares at any time with low transaction costs. As the new millennium dawned, stock markets had developed many modern features, such as margin trading, short selling, and options (“puts and calls”).
Boom and Bust After 1920
The twentieth century brought a long period of prosperity and rapid economic growth. Stock prices did not rise much between 1900 and 1920 but then took off. By 1929, they were worth, on average, four times what they had been in 1920. Stock ownership became widespread, partly through the creation of mutual funds and other investment companies. Speculation was extensive. The result was that stock prices rose much more than corporate profits. Yields on common stocks fell below those on high-quality bonds. When stock prices stopped rising in 1929, many investors tried to sell. From their high levels of September, 1929, stock prices lost one third of their value by November. The market decline followed the beginnings of an economic downturn, which it aggravated. By June, 1932, stock prices were on average down 85 percent from 1929. The market drop was more symptom than cause of the Great Depression, which reduced corporate profits below zero by 1933.
Stock market reform was a priority for President Franklin D. Roosevelt’s New Deal. The Securities Exchange Act of 1934 established the Securities and Exchange Commission (SEC). A corporation that wished to issue securities was required to file registration documents with the SEC. These made available to the public information about the financing and management of the firm. The SEC has monitored and publicized insider trading and proxy solicitations. SEC regulation of stock markets prohibited collusive manipulations intended to drive stock prices up or down. The SEC has been credited with promoting transparency in American financial markets.
The Depression and World War II kept stock trading in the doldrums until it revived during the 1950’s. The number of stock owners rose from 6.5 million in 1952 to 31 million in 1970. Trading on the NYSE grew from 200 million shares in 1940 to 1 billion shares in 1961. Stock trading continued to involve numerous regional exchanges and the American Stock Exchange (which evolved out of the curb market), as well as over-the-counter (OTC) markets. The NYSE was the dominant element. In 1971, OTC traders developed NASDAQ (the National Association of Securities Dealers Automatic Quotations).
The organization of stock markets continued to be controversial as the new millennium began. Revolutionary changes in communication and computer technology seemed to make the traditional face-to-face trading obsolete. An increasing fraction of stocks was held by institutions, particularly mutual funds. Ownership of stocks continued to expand. By 2005, about half of American households owned stocks, many through employer-sponsored 401(k) retirement plans.
Financial Crisis of 2008
The financial crisis of 2007-2008 led to wild fluctuations in stock prices in the United States and in other major countries. Stock prices initially seemed immune to distress. A price peak in October, 2007, took the widely publicized Dow Jones Industrial Average to the 14,000 level. During much of 2008, the index remained relatively steady around an average value of 11,000, ending August around 11,600. Despite wide fluctuations, the index ended September around 10,800. The Lehman Brothers bankruptcy and the need to bail out AIG (American International Group) generated huge selling of securities by financial firms both in the United States and overseas. By October 10, the index had fallen almost to 8,000, representing a decline of more than one-third since the beginning of the year. Other countries displayed similar patterns. Compared with the start of 2008, stocks had fallen 31 percent in Canada, 33 percent in Britain, and nearly 40 percent in France and Germany. Stocks of troubled financial firms declined nearly to zero. During November, 2008, stock prices experienced violent short-run movements but remained within sight of the 8,000 mark for the Dow Jones Industrial Average. The prospect of declining corporate earnings resulting from the onset of recession prevented a more vigorous recovery.
The market gradually recovered over the following years, but declined again during the administration of President Donald Trump, as worsening relations with other countries, particularly China, led to tariffs and other issues with foreign trade. December 2018 was the Dow's worst December since the Great Depression, and overall in 2018 the Dow declined by 6.7 percent from the previous year and NASDAQ declined by 4.6 percent, the largest one-year decline since 2008 for both.
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