The Origins of the Stock Exchange (Part I)

In 2011, tens of thousands of people held protests and sit-ins in front of stock exchanges all over the world as part of the “Occupy Wall Street” movement. Montreal was no different.

In 2021, protests began again in New York, this time under the banner “Re-Occupy Wall Street.”  Let’s go back in time and see how and why stock exchanges came to be…

By Raymond Viger 

The stock exchange was born in the 12^th century. It allowed for the regulation and the control of debts owed by agricultural communities to the banks.

In 1602, the stock exchange became what we know today with the first company issuing shares. The aim was to finance these companies through selling shares. The stock exchange allowed for the development of projects too big for a single financier to take on.

To lessen market risks, derivatives were created. Derivatives are deals for sale and for purchase. They fix prices in advance, thus protecting the manufacturer from variations in their costs of doing business. This allows a manufacturer to secure the prices of primary resources necessary for production. For a manufacturer with foreign customers or suppliers, derivatives also allow for protection from currency variations.

Interest rates are also a risk that manufacturers have to worry about.

The Stock Exchange: A Tool of Development

So the stock exchange became an economic tool that allows for economic balance and business continuity. It’s a trading place for a buyer who wants to take a risk and invest their savings to make an honest profit, and a business that wants to evolve and expand.  

In the 18^th century, stock markets multiplied with the Industrial Revolution, a period of intense manufacturing and financial development.

In 1970, in France, stock options were introduced. Options are contracts that allow individuals to buy a specified number of shares in the company they work for at a fixed price. It’s used as a reward for the heads of companies, who can be paid in options.   So the top executive can, at a future date, buy shares in their own company at today’s price.  

Two motives lay behind the introduction of stock options. On the one hand, it allows businesses to hire good prospects and pay them with the value that they will generate. On the other hand, options allow companies to pay executives in proportion to the financial results they’re expecting. The better the executive performs, the greater the value of their options.  

Updated from Raymond Viger’s blog, April 5th, 2012