The first stock markets got their start as kings, merchants, and adventurers traveled to new, unexplored lands in search of new riches. But it was the development of new technology that helped transform early markets into the exchanges we all know and recognize today.
A Brief Introduction to the Markets
The first exchanges were for debts, rather than assets. Medieval kings and crusading lords had to borrow money to fund their expeditions and wars. They borrowed the money from wealthy merchants by selling part of the debt to other merchants in exchange for a share in the profit when the debts were repaid with interest. Today, we call this trading of debt “bond markets”.
In order for the great shipping nations of Europe to explore and discover new lands and resources such as gold, spices, raw materials, and other luxuries, the fleets of ships being used had to be funded. In some cases, the monarch funded the exploration. Ferdinand and Isabella of Spain funded Columbus’s voyage of 1492, for example. In other cases, the funding came from merchants. Rather than merely lend the money and trade the bonds to reduce the risk, merchants began to join together to form a company that funded their own venture. They were, literally, the first venture capitalists.
Initially, a new company would be formed for each voyage and be disbanded when the fleet returned. As the process evolved, the same company with the same jointly held stock (hence joint-stock company) owned by the same merchant adventurers would fund new trading ventures. Many companies grew wealthy, and their stock became a valuable, highly sought after asset in its own right.
Instead of buying stock shares for cash, they could simply be traded. Because not every ship would return to port, laden with goods for sale, merchants would spread their risk by exchanging stocks in one business venture for stocks in another.
The regular trading of stock certificates in the sixteenth and seventeenth centuries grew into an official, formal, and controlled element of modern-day finance. The world had become a larger place with international trade.
Now let us jump ahead and look at the more recent history of the stock market.