August 16, 2023
Neither artificial intelligence (AI) programs nor humans can predict with 100% accuracy the day-to-day swings or the cyclical fluctuations in the stock market. Some predictions will be correct, some will fail. There are too many variables involved, including unpredictable events and all the ensuing emotions of market participants.
Sometimes a little information is all we need to make smart decisions in life. Just knowing that there will be swings and fluctuations in the stock market is sufficient information to implement a time-proven investment plan of action. The method referred to as "dollar cost averaging" has worked well in the past, and will most likely continue working well in the future.
Instead of trying to time the market, waiting for the perfect opportunity to buy super low and sell super high, just buy consistently over time. Buy high-quality, low-few, exchange traded funds (ETFs) holding a baskets of quality stocks. Buy steadily over time in fixed intervals and amounts that you can afford. For example, put aside 10% of your weekly income to buy stocks every Wednesday. You can set it up in any electronic market trading platform for free. Sometimes you will be buying high and sometimes low. In the long run, provided that the overall stock market keeps increasing gradually over time as it has done in the last centuries, you will be making gains and accumulating wealth over time.
Below is a brief history of financial markets followed by a brief prediction of the future that humans and AI systems will most likely create in the next few decades.
Brief History of the Stock MarketThe history of the stock market is a complex and fascinating journey that spans centuries and involves various economic, technological, and social developments. Some argue that the origins of the stock market can be traced back to the 1600s (17th century) and informal gatherings of traders in London coffeehouses. These traders would buy and sell shares of various ventures, including overseas trading companies. The first official stock exchange, the London Stock Exchange (LSE), was established in 1801. Prior to the LSE, the Venetian Bourse operated as a quasi stock market.
The Venetian Bourse, also known as the Borsa di Venezia, was a historical financial institution located in the city of Venice, Italy. It played a significant role in the economic and financial activities of Venice during the Renaissance period.
The Venetian Bourse was established in the late 1200s (13th century), making it one of the earliest examples of organized financial markets in Europe. The institution emerged as a response to the growing trade and economic activities in Venice, which was a major hub for international trade and commerce.
The primary purpose of the Venetian Bourse was to facilitate the trading of commodities, financial instruments, and securities. Merchants and traders gathered at the Bourse to buy and sell goods, shares of trading ventures, and financial instruments like bills of exchange.
The Venetian Bourse was housed in a building called the Palazzo della Borsa, which was located in the heart of Venice. The Palazzo della Borsa was designed by architect Tommaso Temanza, and was not completed until late in the 1700s (18th century). It featured a neoclassical design and housed trading halls and offices.
The Venetian Bourse facilitated trading in a wide range of goods, including spices, textiles, precious metals, and more. It also played a role in currency exchange and trade financing through the trading of bills of exchange, which were early forms of credit instruments.
The Venetian Republic faced decline in the late 1700s (18th century) due to factors like political instability, changing trade routes, and economic challenges. The Venetian Republic fell to Napoleon's forces in 1797, leading to the dissolution of the republic and the closure of the Venetian Bourse.
The primary purpose of the Venetian Bourse was to facilitate the trading of commodities, financial instruments, and securities. Merchants and traders gathered at the Bourse to buy and sell goods, shares of trading ventures, and financial instruments like bills of exchange.
The Venetian Bourse was housed in a building called the Palazzo della Borsa, which was located in the heart of Venice. The Palazzo della Borsa was designed by architect Tommaso Temanza, and was not completed until late in the 1700s (18th century). It featured a neoclassical design and housed trading halls and offices.
The Venetian Bourse facilitated trading in a wide range of goods, including spices, textiles, precious metals, and more. It also played a role in currency exchange and trade financing through the trading of bills of exchange, which were early forms of credit instruments.
The Venetian Republic faced decline in the late 1700s (18th century) due to factors like political instability, changing trade routes, and economic challenges. The Venetian Republic fell to Napoleon's forces in 1797, leading to the dissolution of the republic and the closure of the Venetian Bourse.
While the Venetian Bourse no longer exists, its historical significance lies in its role as an early example of a formal financial institution that facilitated trade, commerce, and financial activities.
The concept of organized trading venues and financial markets established by institutions like the Venetian Bourse laid the foundation for modern stock exchanges and financial markets around the world.
The London Royal Exchange
The London Royal Exchange is a historic building in the City of London that has served as a center of commerce, trade, and social interaction for centuries. Here's a brief overview of its history:
Origins and Establishment:The London Royal Exchange was founded in the 1500s (16th century). Its origins date back to 1565 when Sir Thomas Gresham, a wealthy merchant and financial agent to Queen Elizabeth I, proposed the idea of a dedicated trading center for merchants and traders. Gresham's vision was to create a place where merchants could gather to conduct business, exchange information, and establish commercial relationships.
The first Royal Exchange was opened in 1566 by Queen Elizabeth I herself. It was a grand building with an open courtyard and galleries that housed shops and offices for merchants. The Exchange facilitated trading in a wide range of commodities, including textiles, spices, metals, and more.
The original Royal Exchange was destroyed in the Great Fire of London in 1666, which ravaged a significant portion of the city. In the aftermath of the fire, plans were made to rebuild the Royal Exchange. Sir Christopher Wren, the renowned architect, was tasked with designing the new building.
The second Royal Exchange, designed by Christopher Wren, was completed in 1669. It was a grand neoclassical building with a central courtyard surrounded by arcades and galleries. The new Exchange continued to serve as a hub for merchants, traders, and businesses, playing a vital role in the city's commercial activities.
The second Royal Exchange suffered severe damage during World War II due to bombing raids.
After the war, the decision was made to reconstruct the building as a center for luxury shops, boutiques, and high-end retail businesses. The London Royal Exchange building stands as a symbol of the city's commercial history and its role as a global financial center. It has witnessed centuries of economic changes and continues to be an iconic landmark in the heart of the City of London.
After the war, the decision was made to reconstruct the building as a center for luxury shops, boutiques, and high-end retail businesses. The London Royal Exchange building stands as a symbol of the city's commercial history and its role as a global financial center. It has witnessed centuries of economic changes and continues to be an iconic landmark in the heart of the City of London.
While the origins of modern stock trading can be traced back to various historical developments, the Dutch played a significant role in popularizing and formalizing many aspects of stock trading that laid the foundation for today's stock markets.
The Amsterdam Stock Exchange
The Dutch Republic (Netherlands) was a hub of economic activity, trade, and financial innovation in the 1600s (17th century). The Dutch East India Company (Vereenigde Oost-Indische Compagnie or VOC) and the Dutch West India Company (WIC) were among the earliest joint-stock companies that issued shares to fund their ambitious overseas trade ventures. These shares were traded on early stock exchanges in cities like Amsterdam.
The Amsterdam Stock Exchange, established in 1602, is often considered one of the earliest formal stock exchanges in the world. It served as a venue for trading VOC and WIC shares, as well as other commodities, bonds, and shares or securities. This diversity helped shape the concept of formal markets for trading different types of financial instruments.
In 1637, the Dutch experienced a speculative bubble known as Tulip Mania, where prices of tulip bulbs reached extraordinary levels before dramatically crashing. While not directly related to modern stock trading, this event highlighted the risks of speculative trading and influenced the development of financial regulations.
The Dutch introduced various financial instruments, including futures contracts and options, which contributed to the development of derivatives trading. In response to market volatility and speculative excesses, the Dutch authorities implemented regulations to oversee trading and protect investors' interests.
While the Dutch played a crucial role in early stock trading practices, it's important to note that similar activities were also taking place in other parts of the world, including Italy and England. The Venetian Bourse and the London Royal Exchange, for instance, predate the Amsterdam Stock Exchange.
In summary, while the Dutch did not "invent" stock trading, they made significant contributions to its formalization, the establishment of stock exchanges, and the development of financial instruments and regulations that influenced the evolution of modern stock markets.
The New York Stock Exchange
In 1792, 24 stockbrokers signed the Buttonwood Agreement under a buttonwood tree on Wall Street in New York City. This agreement established rules and regulations for trading securities, including stocks and bonds. This marked the establishment of the New York Stock & Exchange Board, which eventually became the New York Stock Exchange (NYSE).
The New York Stock Exchange (NYSE) is one of the world's most well-known and influential stock exchanges. It has played a significant role in shaping the American financial landscape. In the early years, the NYSE operated in various locations in New York City, including the Tontine Coffee House and the New York Merchants' Exchange. The NYSE moved into its first permanent building on Wall Street in 1865. This iconic building, with its neoclassical architecture, became a symbol of the financial district.
Throughout the 19th and early 20th centuries, the NYSE experienced growth, technological advancements, and regulatory changes that shaped modern securities trading. In 1878, the NYSE introduced the ticker tape, which allowed traders to receive real-time price information about stocks.
The NYSE was affected by various market crashes, including the Panic of 1907 and the Great Crash of 1929. These events led to changes in regulations and the establishment of the Securities and Exchange Commission (SEC) in 1934.
The NYSE underwent significant changes in the latter half of the 20th century with the adoption of electronic trading systems, such as the Designated Order Turnaround (DOT) system in the 1970s. In 2006, the NYSE merged with the electronic trading platform Archipelago, creating a hybrid market that combined traditional floor trading with electronic trading.
The New York Stock Exchange has a rich history marked by innovation, market fluctuations, regulatory changes, and technological advancements. It remains a symbol of American capitalism and serves as a hub for global financial transactions.
Asian Stock Markets
Europe and the United States were not the only places hosting stock markets. Asia has hosted stock markets for centuries. The oldest stock market in Asia is the Bombay Stock Exchange (BSE), located in Mumbai, India. It has a history dating back to the 19th century and has played a significant role in India's financial development. Here's an overview of the history of Asian stock markets:
Bombay Stock Exchange (BSE), India (1875):The BSE was founded in 1875 as the Native Share & Stock Brokers' Association. It officially became the Bombay Stock Exchange in 1957.
The BSE played a crucial role in India's industrial and economic growth, allowing companies to raise capital through the issuance of shares and bonds.
The exchange adopted electronic trading in the 1990s, marking a significant technological advancement.
Tokyo Stock Exchange (TSE), Japan (1878):The Tokyo Stock Exchange was established in 1878 as the Tokyo Kabushiki Torihikijo. It played a central role in Japan's modernization and economic development. The TSE underwent several transformations, adopting electronic trading systems and expanding its global presence.
Hong Kong Stock Exchange (HKEX), Hong Kong (1891):The Hong Kong Stock Exchange traces its roots back to 1891. It played a pivotal role in Hong Kong's emergence as an international financial center. The exchange experienced growth alongside Hong Kong's economic development and was instrumental in connecting China with international capital markets.
Singapore Exchange (SGX), Singapore (1930s):While stock trading took place in Singapore as early as the 1930s, the Singapore Exchange (SGX) in its current form was established in 1999 through the merger of two stock exchanges.
The SGX has become a key player in Southeast Asia's financial ecosystem.
Shanghai Stock Exchange (SSE), China (1990):While China's financial markets have a long history, the modern Shanghai Stock Exchange was officially established in 1990 as part of China's economic reforms. The SSE has grown significantly, becoming one of the world's largest stock exchanges.
National Stock Exchange of India (NSE), India (1994):The NSE was established in 1994 as a response to the need for a modern and efficient stock exchange in India. It introduced electronic trading and played a vital role in transforming India's financial landscape.
Korea Exchange (KRX), South Korea (2005):The Korea Exchange was created in 2005 through the merger of several Korean exchanges. It serves as a unified platform for stock, derivatives, and commodities trading.
These stock markets have collectively contributed to the economic growth and development of their respective countries and the broader Asian region. They have evolved over time, adopting technological advancements and adjusting to changing global financial dynamics. Each market has its unique history and challenges, reflecting the diverse economic and political contexts of their host countries.
STEM driven economic growth
STEM is the driving force in all stock markets around the world today, and that has been the case since the 1800s (19th century). The 19th century saw the rise of the industrial revolution, which led to the formation of many companies seeking funding for expansion. This increased demand for capital led to the growth of stock markets in Europe and the United States.
Railroad Boom and Panic of 1873: The development of railroads in the mid-19th century triggered a stock market boom. However, the Panic of 1873, a severe economic depression, caused many companies to fail and led to widespread financial turmoil.
Great Crash of 1929: The stock market crash of 1929 marked the beginning of the Great Depression. The crash was caused by speculative trading, excessive borrowing, and economic weaknesses. This event had a profound impact on the global economy. In 1934, the U.S. government established the SEC to regulate and oversee the securities industry, ensuring fair practices and investor protection.
The post World War II period saw significant economic growth and the expansion of stock markets globally. Wars, after all can be said to be the "mother of all STEM". The rise of institutional investors and mutual funds also transformed the stock market landscape.
The latter half of the 20th century brought many more technological advancements, such as electronic trading platforms and computerized order matching systems, which greatly increased the speed and efficiency of trading. The 1990s and 2000s witnessed increased globalization, with stock exchanges connecting globally. The internet enabled individual investors to access real-time information and trade stocks online.
Railroad Boom and Panic of 1873: The development of railroads in the mid-19th century triggered a stock market boom. However, the Panic of 1873, a severe economic depression, caused many companies to fail and led to widespread financial turmoil.
Great Crash of 1929: The stock market crash of 1929 marked the beginning of the Great Depression. The crash was caused by speculative trading, excessive borrowing, and economic weaknesses. This event had a profound impact on the global economy. In 1934, the U.S. government established the SEC to regulate and oversee the securities industry, ensuring fair practices and investor protection.
The post World War II period saw significant economic growth and the expansion of stock markets globally. Wars, after all can be said to be the "mother of all STEM". The rise of institutional investors and mutual funds also transformed the stock market landscape.
The latter half of the 20th century brought many more technological advancements, such as electronic trading platforms and computerized order matching systems, which greatly increased the speed and efficiency of trading. The 1990s and 2000s witnessed increased globalization, with stock exchanges connecting globally. The internet enabled individual investors to access real-time information and trade stocks online.
The 21st century has been marked by several major financial crises, including the dot-com bubble burst (early 2000s), the 2008 global financial crisis, and the COVID-19 pandemic-induced market volatility (2020).
The Artificial Era
The Artificial Era is just beginning. The Artificial Era is the part of the information age in which artificial technologies (i.e. tools and methods created by humans) such as AI are beginning to supplement, and often replace, everything that is non-artificial.
The stock market is an artificial technology (i.e. tool and method invented by humans) to spread commercial risks and share proceeds amongst market participants. Participating in the stock market is neither perfect nor risk free. However, it beats the alternatives.
All humans and corporations need money to survive and thrive. To make money, commercial enterprises need to sell products or services for profit. To produce or market products and services, commercial enterprises need "seed" money or capital. The stock market provides a mechanism or platform for commercial enterprises to obtain capital. Investors provide the capital in exchange for "securities" (unsecured ownership shares) in the relevant commercial venture. If the venture fails, the investors lose their money. If ventures succeed, investors make money.
Stock markets began centuries ago, and have only increased in popularity, size, and influence over time. By investing consistently in diversified high-quality stocks and bonds over a long time, and with a value-driven long term horizon you can guarantee having the highest chances of accumulating wealth in the stock market over time.
AI is promising technology that will only make it easier for humans to participate effectively in stock markets. You bet.
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