Today, the stock market is a fact of everyday life. We hear news about it; we monitor it; we invest in it. But have you ever wondered how we got here and about the history of investing? Just like human history, the stock market has gone through countless twists and turns to develop into the structure that we know today.
History of Investing
According to historical accounts, investing can be traced back to the Code of Hammurabi, which was written around 1700 BCE in Mesopotamia (modern day Iraq). Historians argue that the historic code provided the framework for many of civilization’s essential laws, including the legal framework for investment. The law established a way to pledge collateral in exchange for investing in a project. In the code, the land was pledged as collateral, and anyone who broke their obligation was punished.
While the Code of Hammurabi provided the foundational laws, most modern investing go back to 17th century Europe.
Amsterdam Stock Exchange
The Amsterdam Stock Exchange is regarded as the predecessor of modern investing. It is said to operate much like current stock exchanges, which connects potential investors with investment opportunities while also allowing people in business to communicate with willing investors. Furthermore, the structure of the Amsterdam Stock Exchange itself made investing more straightforward and standardized, paving the way for the modern stock exchange.
Modern pension funds
One of the most significant financial products on the market today is a pension fund, the origin of which can be traced back to the Presbyterian Ministers’ Fund in 1759. Throughout the century, companies and organizations began to realize the value of a good pension fund, and thus, began offering it themselves.
The industrial revolution
The First and Second Industrial Revolutions are notorious for its rough working conditions and child labor. However, it also gave us banking and investing. At the time, the general population started to have surplus money from their jobs. Instead of spending it all on pressing needs, such as food and shelter, they suddenly had savings. This phenomenon paved the way for banking and investing, where people could store their money in anticipation of future needs.
The foundation of modern investing
The 1800s gave us the foundations of modern investing. Some of the world’s largest financial institutions and banking firms were founded at this time, including Goldman Sachs, JP Morgan, and Lehman Brothers, among others.
The development of banking also paved the way for the development of international investing. At this time, financial institutions realized the power of investing in the colonies. This period also led to the emergence of stock indexes.
The advent of stock indexes
In the 1800s, measuring the performance of various stocks was a lot more complicated than merely checking stock indexes. Finance journalist Charles H. Dow created the first version of a stock index by averaging the top 12 stocks of crucial industrial sectors—mining companies, railroads, and steel mills, to name a few. This was called the Railroad Average, which was later renamed Dow Jones Transportation Average, and eventually, Dow Jones Industrial Average. Today, the Dow is still an essential part of the investing ecosystem, measuring 30 companies from various industries, including Coca-Cola.
Recessions and depressions are two words we would rather not hear. After all, the past recessions and depressions meant an unpleasant economic shakedown. Since the founding of the U.S. in 1774, the country has experienced 47 downturns, which were mostly mild. However, the stock market crash in 1929 changed everything as it led to the Great Depression. This momentous economic event led the entire world to change the way they invested and spent their money.
Securities Exchange Act of 1934
The establishment of the Securities Exchange Act of 1934 was another sharp turn in the history of investing. It organized laws that governed the secondary trading market. Because of the act, exchanges across the country, which include stocks and bonds, could be executed efficiently in secondary markets. You can read the entire document here.
The internet age
Just like the industrial revolution, the emergence of the internet and other electronic communication platforms had a profound impact on the development of investing. The existence of modern communications led to the development of the NASDAQ 100, which was designed to be a market-weighted index—much like S&P—but it included more technology companies.
However, in the late 1990s, the overexposure of the NASDAQ led to investors boosting the tech bubble, which precipitated the bursting of the dotcom bubble.
Today, investing is made more accessible and more straightforward for everyone around the world. Countries have their stock markets, and international brokers make it easier to invest across the globe. Modern investors can now choose from a wide range of investment products, including stocks, bonds, ETFs, mutual funds, commodities, futures, foreign currencies, and real estate, among others. Furthermore, the existence of online brokers made investing more accessible through cheaper commissions and trading fees.
New technologies and developments will, no doubt, impact modern investing as we know it. The chapters of the history of investing continues to be written.