Principles of Islamic banking and finance/PIBF203/Investment in stocks/Historical background

Historical background of trading in shares

During the Roman Republic, the state leased out many of its services to private companies. These government contractors were called publicani, or societas publicanorum as individual company. These companies were similar to modern corporations, or joint-stock companies more specifically, in a couple of aspects. They issued shares called partes (for large cooperatives) and particulae which were small shares that acted like today's over-the-counter shares. Almost every citizen participated in the government leases. There is also an evidence that the price of stocks fluctuated. The Roman orator Cicero speaks of partes illo tempore carissimae, which means “shares that had a very high price at that time." This implies a fluctuation of price and stock market behavior in Rome.

Around 1250 in France at Toulouse, 96 shares of the Société des Moulins du Bazacle, or Bazacle Milling Company were traded at a value that depended on the profitability of the mills the society owned. As early as 1288, the Swedish mining and forestry products company Stora has documented a stock transfer, in which the Bishop of Västerås acquired a 12.5% interest in the mine (or more specifically, the mountain in which the copper resource was available, Great Copper Mountain) in exchange for an estate.

The First Stock Exchange - Sans the Stock

“Belgium boasted a stock exchange as far back as 1531, in Antwerp. Brokers and moneylenders would meet there to deal with business, government and even individual debt issues. It is odd to think of a stock exchange that dealt exclusively in promissory notes and bonds, but in the 1500's there were no real stocks. There were many flavors of business-financier partnerships that produced income like stocks do, but there was no official share that changed hands.”

The earliest recognized joint-stock company in modern times was the English (later British) East India Company, one of the most famous joint-stock companies. It was granted an English Royal Charter by Elizabeth I on December 31, 1600, with the intention of favouring trade privileges in India. The Royal Charter effectively gave the newly created Honourable East India Company (HEIC) a 15-year monopoly on all trade in the East Indies. The company transformed from a commercial trading venture to one that virtually ruled India as it acquired auxiliary governmental and military functions, until its dissolution.

The East India Company's flag initially had the flag of England, St. George's Cross, in the corner. Soon afterwards, in 1602, the Dutch East India Company issued the first shares that were made tradeable on the Amsterdam Stock Exchange, an invention that enhanced the ability of joint-stock companies to attract capital from investors as they now easily could dispose of their shares. The Dutch East India Company became the first multinational corporation and the first megacorporation. Between 1602 and 1796 it traded 2.5 million tons of cargo with Asia on 4,785 ships and sent a million Europeans to work in Asia, surpassing all other rivals.

The innovation of joint ownership made a great deal of Europe's economic growth possible following the Middle Ages. The technique of pooling capital to finance the building of ships, for example, made the Netherlands a maritime superpower. Before adoption of the joint-stock corporation, an expensive venture such as the building of a merchant ship could be undertaken only by governments or by very wealthy individuals or families.

“The launch of the Dutch East India Company in 1602 initiated Amsterdam's transformation from a regional market town into a dominant financial center. The Company introduced easily transferable shares, and within days buyers had begun to trade them. Soon the public was engaging in a variety of complex transactions, including forwards, futures, options, and bear raids, and by 1680 the techniques deployed in the Amsterdam market were as sophisticated as any we practice today.”

Economic historians find the Dutch stock market of the 17th century particularly interesting. There is clear documentation of the use of stock futures, stock options, short selling, the use of credit to purchase shares, a speculative bubble that crashed in 1695, and a change in fashion that unfolded and reverted in time with the market (in this case it was headdresses instead of hemlines). Edward Stringham also noted that the uses of practices such as short selling continued to occur during this time despite the government passing laws against it. This is unusual because it shows individual parties fulfilling contracts that were not legally enforceable and where the parties involved could incur a loss. Stringham argues that this shows that contracts can be created and enforced without state sanction or, in this case, in spite of laws to the contrary.

A Little Stock With Your Coffee?

Because the shares in the various East India companies were issued on paper, investors could sell the papers to other investors. Unfortunately, there was no stock exchange in existence, so the investor would have to track down a broker to carry out a trade. In England, most brokers and investors did their business in the various coffee shops around London. Debt issues and shares for sale were written up and posted on the shops' doors or mailed as a newsletter.

The first stock exchange

Despite the ban on issuing shares, the London Stock Exchange was officially formed in 1801. Since companies were not allowed to issue shares until 1825, this was an extremely limited exchange. This prevented the London Stock Exchange from preventing a true global superpower. That’s why the creation of the New York Stock Exchange (NYSE) in 1817 was such an important moment in history.

The NYSE has traded stocks since its very first day. Contrary to what some may think, the NYSE wasn’t the first stock exchange in the United States. The Philadelphia Stock Exchange holds that title. However, the NYSE soon became the most powerful stock exchange in the country due to the lack of any type of domestic competition and its positioning at the center of U.S. trade and economics in New York. The London Stock Exchange was the main stock market for Europe, while the New York Stock Exchange was the main exchange for America and the world.

Modern stock markets

Today, virtually every country in the world has its own stock market. In the developed world, major stock markets typically emerged in the 19th and 20thcenturies soon after the London Stock Exchange and New York Stock Exchange were first created. From Switzerland to Japan, all of the world’s major economic powers have highly-developed stock markets which are still active today.

Canada, for example, developed its first stock exchange in 1861. That stock exchange is the largest in Canada and the third largest in North America by market capitalization. It includes businesses based in Canada and the rest of the world. The TSX, as it is known, hosts more oil and gas companies than any other stock exchange in the world, which is one major reason why it has such a high market cap.

Even war-torn countries like Iraq have their own stock markets. The Iraq Stock Exchange doesn’t have a lot of publicly-traded companies, but it is available to foreign investors. It was also one of the few stock markets unaffected by the economic crisis of 2008.

Stock markets can be found around the world and there’s no denying the global importance of stock markets. Every day, trillions of dollars are traded on stock markets around the world and they’re truly the engine of the capitalist world.

After dominating the world economy for nearly three centuries, the New York Stock Exchange faced its first legitimate challenger in the 1970s. In 1971, two organizations – the National Association of Securities Dealers and Financial Industry Regulatory Authority – created the NASDAQ stock exchange.

NASDAQ (National Association of Securities Dealers Automated Quotations)

NASDAQ has always been organized differently from traditional stock exchanges. Instead of having a physical location, for example, NASDAQ is held entirely on a network of computers and all trades are performed electronically. Electronic trading gave the NASDAQ a few major advantages over the competition. First and most importantly, it reduced the bid-ask spread. Over the years, competition between Nasdaq and the NYSE has encouraged both exchanges to innovate and expand. In 2007, for example, the NYSE merged with Euronext to create NYSE Euronext – the first transatlantic stock exchange in the world.

The Nasdaq was the brainchild of the National Association of Securities Dealers (NASD) — now called the Financial Industry Regulatory Authority (FINRA). From its inception, it has been a different type of stock exchange. It does not inhabit a physical space, as with 11 Wall Street. Instead, it is a network of computers that execute trades electronically. The introduction of an electronic exchange made trades more efficient and reduced the bid-ask spread — a spread the NYSE wasn't above profiting from. The competition from Nasdaq has forced the NYSE to evolve, both by listing itself and by merging with Euronext to form the first trans-Atlantic exchange. (To learn more, check out The Tale Of Two Exchanges: NYSE And Nasdaq and The Global Electronic Stock Market.) http://www.investopedia.com/articles/07/stock-exchange-history.asp </ref>