The Beginning — and Purpose — of the Stock Market

The first publicly-traded stock was the Dutch East India Company, which debuted on the Amsterdam Stock Exchange in 1602.

In the U.S., investors began trading stocks on May 17, 1792, when 24 New York City stockbrokers and merchants gathered under a Buttonwood tree outside of 68 Wall Street to form the New York Stock Exchange (NYSE). There were just five publicly-traded securities, with the Bank of New York being the very first listed company.

Today, there are some 79 major stock exchanges in the world, dominated by the NYSE, which accounts for about 40% of the total market value in the world.

The purpose of stock markets remains the same: to raise capital for businesses. In turn, both retail and institutional investors have the opportunity to invest their monies and profit as the companies grow. And, as you can see from the following 100-year chart of the Dow Jones Industrial Average (Figure 1), investors have done very well.

When the Dow Jones Industrial Average (DJIA, an average of 30 large, publicly-traded stocks) was first published in the mid-1880s, it traded at 62.76. Today, the DJIA is around 27,000. That’s a pretty handsome return—and much higher gains than you would receive in pretty much any other investment.

For example, CIBC Wood Gundy calculated the gains of stocks vs. bonds for 100 years. The result: “Data from the University of Chicago shows that, over the past 100 years, if you owned equal amounts of every U.S. stock excluding the smallest 20%, you would have enjoyed average annual growth of 11.5%, for an inflation-adjusted (real) return of 8.3%. Over the same period, fixed-income investments averaged 4.3%, or real returns of just 1.1% per year. So, the real returns from equities were nearly seven times higher than those of bonds.” Stock markets are key to financing companies across the globe, creating wealth, and stimulating economies, worldwide.

These averages are wonderful, but they are just that—averages. Some investors have done much better (take Warren Buffett, Chairman of Berkshire Hathaway (BRK-B), for example). And others have not fared nearly as well. The process of investing requires a little study before jumping in.

First Things First—What is Your Investing Temperature?

It’s critical to take your investing temperature so that you know how much of a risk-taker you are; this will help you determine your investing strategy. I’ve devised a simple questionnaire to help you determine your investing style and risk temperament. You can access it here. It’s an important first step along your path to investing. Once you’ve taken the quiz, you’ll know if you are an aggressive, moderate, or conservative investor. And that will drive your investing decisions.

Does Your Age make a Difference?

For many years, investment pros recommended a drastic decrease in stocks with an aggressive increase in bonds, as folks aged. Here is the conventional model (Figure 2):

But as the mortality rate has increased, your money has to last longer, so today, investment advisors are recommending retaining more stocks and fewer bonds as we age, as shown in this table (Figure 3):

Of course, your allocation will depend upon your personal risk profile and investment goals. These are just guidelines.

Choosing the Right Brokerage

For most beginning investors, your number one concern is cost. What is the fee to trade a stock? But you should also consider a company that makes it easy to trade, offers mobile trading, and promotes investor education. As you progress on your investment journey, you’ll have other needs, but in the beginning, it’s best to keep it simple.

I’ve found this comparison of five major online firms which you may find helpful. The following (Figure 4) is just a brief excerpt of the complete comparison table. Use theStockBrokers.com comparison tool to compare 17 online brokers and over 4,000 data points. Investors can compare ratings from the 2019 Review as well as trading costs and over 150 individual account features.

Figure 4: Comparison of 5 Online Brokerages

Why Should You be in the Driver’s Seat?

There are plenty of investment advisors that want you to think that you cannot invest on your own. Most advisors want you to turn over all of your hard-earned money to them. And some of them are fantastic money managers. But many are not. And their fees—usually a percentage of your assets—can rapidly eat away at your gains.

And then there’s pooled investing—mutual funds and Exchange-Traded Funds (ETFs), where your monies are ‘pooled’ with other investors so that you can invest in a basket of stocks. Don’t get me wrong; those vehicles can be an excellent way to invest in areas such as foreign countries that limit investment to outsiders and offer an entrée into sectors in which you want to invest, but don’t have much expertise. And they are a good way to diversify your portfolio, as I will discuss later in this investing series. But, bottom line, you won’t, generally, enjoy the gains with funds and ETFs that individual stocks will offer you.

The alternative—learning a bit about investing—can be much more rewarding, and a lot of fun. As history proves—individual stocks hold the greatest opportunities for the largest gains—as long as you are willing to expend a little effort. And once you have a good handle on how investing works, you can sort through the reams of investing advice that is available and choose the investment pros who offer ideas that align with your strategies.

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