The Saga of the Stock Market

The following is a story of how a room full of men shouting at each other, fighting with each other to buy neatly printed paper became one of the most important economic activities of the twenty first century.

 

What is a Stock Market?

 

In simple words a Stock market is a place where stocks, bonds, options and futures, and commodities are traded. Buyers and sellers exchange trade together via platform provided by stock exchange through computers. Trades are done during specific hours on business days Monday to Friday. Stock markets are some of the most important parts of today’s global economy. Countries around the world depend on stock markets for economic growth.

 

stockexchangepicture
(Source: CoddingCapital)

 

Early stock and commodity markets

The evolution of the stock market started from 12th century From France. They had a system where ‘courretiers de change’ managed agricultural debts throughout the country on behalf of banks. Then in 13th century ‘Merchants of Venice’  also started trading in Government securities. Later on in 14th century bankers in Pisa, Verona, Genoa and Florence also began trading in government securities. Italian companies were the first to issue shares. The first genuine stock markets didn’t arrive until the 1500s.

Stocks Cafe

Evidences shows that early stocks were handwritten on sheets of paper, and investors traded these stocks with other investors in coffee shops due to the fact that investors would visit these markets to buy and sell stocks. Nobody really understood the importance of the stock market in those early days. People realized it was powerful and valuable, but they were having no idea of exactly what it would become.

That’s why the early days of the stock market were like the Wild West. In London, businesses would open up overnight and issue stocks and shares of some crazy new venture. In many cases, companies were able to make thousands of pounds before a single ship had ever left harbor.

There was no regulation and few ways to distinguish legitimate companies from illegitimate companies. As a result, the bubble quickly burst. Companies stopped paying dividends to investors and the government of England banned the issuing of shares until 1825.

Evolution of the NYSE and LSE

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 becoming 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 it’s 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.

 

History of the Indian Stock Market

dalal_street

To study the history of the capital market in India we have to look back in the eighteenth century when East India Company started security trading in India. Security trading in India was unorganized during that time. Two chief trading centers were Calcutta and Bombay. Out of them Bombay was main trading port. During American civil war (1860), Bombay was the important center where essential commodities were traded. Because of heavy supply those days prices of stocks enjoyed boom period.  

Probably, the first Indian Stock Exchange’s boom period. It lasted for almost 5 years. After those booming period Indian stock exchange faced the first bubble burst on July 1st 1865. During that time trading in stock market was just a concept, a thought, an idea. It was limited to 12-15 brokers only. There market was situated under a banyan tree in front of the Town hall in Bombay. These brokers organized an informal association, in 1875. Name of the association was “Native Shares and Stock Broker Association”. Very few visionary could feel that it was starting of the great history of Indian stock exchange. After 5 decades of the incidence, the Bombay stock exchange was recognized in May 1927 under the Bombay Security contracts Control Act, 1925. But still the exchange was not well organized as British Government was not willing to see India as a rising nation. 

After independence, 1st priority of the Indian government was development of the agriculture and public sector undertakings. In first and second five year plan, capital market was not a goal for Indian government. Moreover, the controller of capital issues closely controlled many factors for new issues. It was one reason and big enough to de-motivate Indian corporate to stay away from the idea of going public. 

In 1950s, some good companies listed in the exchange were brokers’ favorite. Some of them were Century Textile, Tata steel, Bombay dyeing, and Kohinoor mills. They were favorite not because of any technical or fundamental reason. The brokers enjoyed trading in these scripts as it was operated by operators. Slowly the stock exchange was given one new name “Satta Bazaar”! But surprisingly, despite of speculation, default cases were very few. In 1956, the government passed the Securities Contract Act. 

In 1960s, Indo China war happened. This was starting of bearish phase in stock exchange. Financial institutes helped to boost the sentiment by injecting liquidity in the market. In 1974, 6th of July was the day when capital market got one bad news. Government introduced the Dividend Restriction Ordinance as per which companies cannot pay more than 12% or 1/3rd of the profits. Stock market crashed again. Stocks went down by 20% and the market was closed for nearly a fortnight. The sentiment of stock market was same until the optimism came in market with when the MNCs were forced to dilute majority stocks in their company in favour of Indian public. Many MNCs left India. But there were around 123 MNCs who offered shares lower than its intrinsic value. It was the first time Indian public had opportunity to invest in some of the finest MNCs.

 In 1977, Mr Dhirubhai Ambani knocked the door of Indian stock exchange and it was probably the turning point not only for Indian stock exchange but for Indian economy.In 1980s, Indian stock exchange witnessed phenomenal growth period. Indian public discovered lucrative opportunities in stock exchange. It was the time when people who did not even know what is stock exchange is, started investing in the same. The growth doubled with the government liberalization process in mid 1980s. It was the time when convertible debentures and public sector bonds were popular in market. New stock market entries like Reliance and LNT re-defined Indian stock market scenario. Such factors enlarged volume in stock exchange. 1980s can be characterized by huge increase in the number of stock market, listed companies and market capitalisation. 

The 1990s can be described as the most important decade in the history of Indian stock market with liberalisation and globalization being in the air. The Capital Issue Act of 1947 was replaced in 1992. SEBI was emerged as a new regulator of the market. FII came to India and re-rated India as one of the most attractive market in world. Stock exchanges numbers rose  in country.

The Bombay stock exchange had two new competitors in market. OTC (Over-The- Counter) was established in 1992 and NSE was established in 1994. The national security clearing corporation (NSCC) and National Securities Depository Limited (NSDL) were established in 1995 and 1996 respectively. In 1995—1996 Option trading service was started. Number of participations in stock exchange was rising with new segments for trading, new products and new technology. 1990s is known as era of Indian IT companies too. Wipro, Infosys, Satyam were some of the favorite stocks. Telecom and Media sector also rose during the same time. 

In the 2000s, FII money started coming in Indian market like never before. NSE volume crossed the BSE trading volume during the same time. And the Indian stock trading scene would never bet the same.

 

This article was written by Varnita Deep (PGDM, Batch 22, XIME-B)

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