Chapter 1: A Brief History of Stock

InvestingBy:

Dr. Scott Brown

Born in a family of Swedish immigrants in a small town near

Atlantic, Iowa.

Frances receives an inheritance of $85,000 in an account

with a nationwide brokerage.

Joe was the broker that managed her inheritance.

Joe took wrong financial positions that led Frances to lose

her inheritance.

The stock broker recommended bad stocks to retired

people, but since he was selective and targeted only the

elderly, who did not know their rights, he was never

prosecuted.

Frances’s history

Founded in 1939, and registered with the SEC.

The NASD was a self-regulatory organization of the securities

industry responsible for the operation and regulation of the

NASDAQ stock market and over-the-counter markets. It also

administrated exams for investment professionals, such as the

Series 7 exam.

The NASD watches over the NASDAQ to make sure the market

operates correctly. In 2007, the NASD merged with the New York

Stock Exchange's regulation committee to form the Financial

Industry Regulatory Authority, or FINRA.

The National Association of Security Dealers (NASD)

Greece• Ship captains offered a share of their profits to those in society

who were able and willing to share in the risk of financing a trading voyage to far away lands across the sea.

Rome• Sold stock as well in huge civic construction projects that were

beyond the means of a single businessman. Stockholders made handsome profits by investing in companies that built roads and aqueducts for the Roman government.

1600’s• The first shares of stock in a corporation were created in the

Dutch East Indies Company in Holland.• People bought stake’s in the trading company.

Brokerage History

Speculation • Speculation followed because investors could sell their shares to one

another over time without waiting for the “ships to come in”.

Stocks movement• The stock price could rise or fall on the faintest of rumors, spreading

panic in the world’s first stock exchange.

1700’s• John Law: was a Scottish economist who believed that money was only

a means of exchange that did not constitute wealth in itself and that national wealth depended on trade. He is consider one of the first “executive insiders”.

• He was responsible for the Mississippi Bubble and a chaotic economic collapse in France.

Brokerage History

Wall Street was named when New York was a tiny colonial outpost. Pilgrims in 1653 built a wall to keep out the Indians.

On Wall Street was the auction block to sell slaves and the pillory for public humiliation.

George Washington (United States president 1789-1797)• Washington was sworn in as the first U.S. president on Wall Street in

1789.

Wall Street was where merchants met underneath a buttonwood tree to auction off stocks, mainly in banks and mines, while collecting a commission on every sale.

Buttonwood Agreement• Started the New York Stock & Exchange Board now called the New

York Stock Exchange, NYSE. This agreement was signed by twenty-four stock brokers outside of 68 Wall Street New York under a buttonwood tree.

Wall Street

Curb Trading (Circuit Breaker)• One type of trading curb is referred to as a "circuit breaker." These

limits were put in place after Black Monday in order to reduce market volatility and massive panic sell-offs, giving traders time to reconsider their transactions.

Telegraph• Samuel Morse was the inventor of the single wired telegraph. • Wall Street used that invention to communicate the information of

the trade and auctions.

Ticker Tape• The ticker printed telegraph signals on a narrow paper tape — the

ticker tape — that carried current prices to brokers throughout the nation.

• Thomas Edison was the creator in 1867.

Wall Street

In the First Economic Expansion Era the markets were completely unregulated by the federal and state governments.

Hetty Green • Was an American businesswoman, remarkable for her frugality during the Gilded

Age, as well as for being the first American woman to make a substantial impact on Wall Street

• Nicknamed “The witch of Wall Street”• She amassed a fortune of $100 million dollars by investing in railroads stocks

and real estate. Eventually became the world’s richest woman.

The railroads were among the most ambitious projects and it’s stocks were very important on Wall Street markets.

Jay Gould• Was a leading American railroad developer and speculator• Nicknamed “The Devil of Wall Street”• Considered the 9th richest American and the 8th worst CEO in the history.

Long Bull Squeeze: is a short-sell manipulation, that technique to make money by driving the price of a stock down.

The First Economic Expansion

“Buy low and sell high”: His profit was the difference between the price received when he initially sold the stock and the price he later paid to buy the stock back.

“Insiders” are investors or managers who have special inside information that can be used to get an unfair edge on the public.

Charles Dow and Edward Jones • Founders of the Wall Street Journal• The Wall Street Journal was published in 1889 and became the first

financial newspaper. • Dow Jones Industrial Average (DJIA) is the most popular stock index

and analyze the most popular stocks. DJIA became the principal stock market barometer.

American Stock Exchange (AMEX)• Was a mutual organization owned by his members• It’s actual name is New York Stock Exchange (NYSE)

The First Economic Expansion

John Pierpont Morgan was the most powerful man in America and the son of a prominent banker.

Recognized as the king of corporate mergers.

J.P. Morgan combined hundreds of companies into a coast-to-coast monopoly.

Andrew Carnegie: was the richest man in the world and possessed the first billion-dollar corporation. He became the richest man after a merge of nine companies leading by J.P. Morgan. The company was U.S. Steel. Carnegie also created the U.S. Public Library and a community college system.

J.P. Morgan was a stern, autocratic man who never gambled. He based his decisions on business fundamentals and a company’s susceptibility to stock manipulation. To protect his favored customers, Morgan insisted on a role in managing every company he created.

J.P. Morgan

John Pierpont Morgan controlled 341 seats on the boards.

President Theodore Roosevelt created anti-trust regulations to

bust up parts of Morgan’s Empire.

Morgan died in 1913.

• The stock exchange closed for two hours as his hearse slowly paraded

by. News of the death made the front page of newspapers around the

world, but editorials were polarized.

J.P. Morgan

By the 1920’s the NYSE, a private institution, looked more architecturally impressive than government buildings.

The auctioneers, now called specialists, controlled the building, intermediating between brokers who represented buyers and sellers in the public.

Radio Corporation of America (RCA)• Was an American electronics company that existed from 1919

to 1986.• Americans bought millions of radios and shares of the company.• The popularity of the wireless would drive up the share price of

the manufacturer RCA.

In the 1920’s the cars also became popular and the demand for auto stocks pushed the prices up.

Second Economic Expansion

The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930’s or early 1940’s. It was the longest, most widespread, and deepest depression of the 20th century.

“Buying on margin”• Buy stocks on credit• This strategy is considered one of the reasons of the Great Depression

and the main problem of the inexperience investors in the 1930’s.

Charles Merrill• Founder of the Merrill Lynch firm.• Merrill predicted the crisis before the 1930’s.

The short sale is made in expectation of a decline in the price of a stock. If the stock price drops, it allows the investor to buy the shares back at a lower price in order to deliver the stock earlier sold short.

The Great Depression

Margin Calls• A broker's demand on an investor using margin to deposit additional

money or securities so that the margin account is brought up to the minimum maintenance margin. Margin calls occur when your account value depresses to a value calculated by the broker's particular formula.

Margin• Buying with borrowed money can be extremely risky because both gains

and losses are amplified. That is, while the potential for greater profit exists, this comes at a hefty price - the potential for greater losses. Margin also subjects the investor to a number of unique risks such as interest payments for use of the borrowed money.

On October 24th, 1929, thousands of investors could not raise the necessary cash by the time their brokers entered the exchange.

The Great Depression

President Franklin Roosevelt

• “There must be a strict supervision of all banking and credit and

investments. There must be an end to speculation with other people’s

money.”

• Roosevelt created the Securities and Exchange Commission (SEC) to

enforce nearly all of the new rules. The SEC’s first chairman was Joseph

Kennedy. The SEC would eventually indict more than 300 people,

including Jesse Livermore, famous for his short selling “plunging” of the

market, in an effort to clean up Wall Street, but the agency found it

virtually impossible to win convictions.

The Great Depression

After the Second World War, surged the greatest expansion in the U.S. Charles Merrill led the new resurgence of the American economy by opening hundreds of branches. These offices helped the growth of the middle class in the U.S.

In the 1950's, Harry Markowicz developed the “Theory of Stock Diversification" which led to the creation of mutual funds.• Markowicz won the Nobel Prize in economics for his theory.• One of the most prominent minds of today’s days, Warren Buffet,

considered the Markowicz’ theory, “an excuse for not thinking”.

OPEC oil embargo• The 1973 oil crisis started in October 1973, when the members of the

Organization of Arab Petroleum Exporting Countries or the OAPEC (consisting of the Arab members of OPEC, plus Egypt, Syria and Tunisia) proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur War.

• Americans waited in line for a gallon of gas, it’s considered one of the most dramatic events in modern history.

The Third Economic Expansion

In 1968, at it’s height, trading volume across the exchange touched off a paper crunch which forced nearly a hundred brokerage companies into insolvency.

Since the 1970’s, computers have assisted brokers with every aspect of the securities’ profession.

On October 19, 1987, the market began an out-of-control decline that came to be known as “Black Monday”. Lightning fast computers had been programmed to instantly sell stocks when prices hit a pre-determined level.

The Dow plunged 508 points — a trading session drop of 23%. The precipitous drop with no unusual news foreshadowing the event taught stock traders a vital lesson that the market will crash when least expected. The stock exchange has since installed a series of so-called “circuit breaker” programs that restrict selling when the Dow fluctuates too rapidly to prevent such runaway disasters in the future.

The Third Economic Expansion

The recent fall of the Soviet Union , with the highest average level of education of any populace, has added over a quarter of a billion brilliant minds to the world economy. China is also undergoing integration into the world marketplace, albeit on its own terms. These recent factors foreshadow a fourth massive global economic expansion.

“The stock market definitely puts the capital in capitalism and if you can learn to think independently and find what is uniquely yours, you can put it to work for you!” Author’s Quote.

The Third Economic Expansion