The Early Days Of Stock Trading

Although stock trading is synonymous with Wall Street, it wasn`t the first stock exchange in the US. That honor actually belonged to the Philadelphia Stock Exchange, which predated the New York Stock Exchange by two years.



The early days of stock trading can be likened to a very exclusive club where you need a VIP pass to join. The New York Stock Exchange was established on the back of the Buttonwood Agreement, which was signed by 24 bankers and financial institutions. The most prominent in this exclusive club, perhaps, was Alexander Hamilton, one of the founding fathers of the United States.

Trading was strictly regulated. In the early days, they mostly traded commodities, and they had to give the stock exchange—and by extension themselves--a commission for each financial transaction. Commodities referred to wheat or grain and gold. And because it was an exclusive gentleman`s club, they always prioritize the members during negotiations.

In a sense, the stock market provided order to the chaos. Back then, people borrowed money in exchange for IOUs instead of commodities. It was very easy to renege on a deal. But the merchants and bankers were really out for blood against the auctioneers who were then licensed by the city to trade twice a day.

In 1972, the stock exchange only recorded five traded securities. The country, however, is on the precipice of unprecedented growth. The country was still then agricultural in scope, but soon the demand for securities shot up as companies needed to raise money for the construction of railroads, bridges and roads. The NY Stock Exchange benefited from both the Industrial Revolution and the Civil War.

There were two significant periods that seriously challenged the stock market—one in 1907 and another during the Great Depression in 1929. The first financial collapse was averted when J.P. Morgan convinced the other bankers to build a banking trust to be financed by financial institutions. At that point, the market was in grave danger of dissolving as 800 million worth of securities was unloaded in weeks. This gives rise, of course, to the founding of the Federal Reserve.

Before the 1929 crash, people were lured by the stock market and there was a lot of speculation that was encouraged by industry insiders. In fact, the average value of stocks grew about 400% more compared to their value just five years earlier. Of course, the bubble had to burst sometime. In just a week after the seams started to show on Oct. 23, 1929, the market crumbled. The country did not recover up until an opportunity struck—World War II.