Have you ever wondered how the idea of modern investment, stock markets, and financial trading came about? If you have, then it may also interest you to know that as early as 1700 BC, there was already an established legal framework for investing.
This framework made reference to concepts like interest, dividends, brokers, and trading of valuable instruments. Curious to learn more about this legal framework and how we came about today’s investment structure? Let’s delve in.
Ancient Foundations and Evidence on Investing
Scholars believe that investing is not a new concept. In fact, they argue that investors played important roles in politics, immigration, trade relations, and settlement patterns around the world since 3,500 BCE.
Earliest records of investments have their roots traced to ancient Mesopotamia (present-day Iraq). Mesopotamia had complex systems of trade known as the ancient Sumerian economy.
Ancient tablets discovered in Sumer suggested that these complex systems involved trading networks, investment practices, currency, debt, as well as buying and selling.
In 1754 BC, a document called the Code of Hammurabi was issued in Mesopotamia by King Hammurabi. This document contains 282 laws, some of which include what can be described as a legal framework for investing.
For example, law 100 of the Code of Hammurabi states that “…he shall write down the interest on the money, as much as he has obtained, and he shall reckon its days and he shall make returns to his merchant.”
This lays a foundation for what we now know as dividends, capital appreciation, brokers, and interest.
Apart from Mesopotamia, other ancient civilizations like Egypt, the Caral-Supe civilization, and ancient Rome also had their own investment activities.
In the book – “Banking and Business in the Roman World,” authored by French historian Jean Andreau, the Murecine (Sulpicii) tablets were viewed as proof of professional money lending for business investments in Puteoli.
The Venetian Money Market
From the 11th to 14th centuries, Venice was popular in Europe for its prowess in double-entry bookkeeping and for pioneering banking and finance in the private and public sectors.
During the 1300s, Venetian lenders used to meet clients with slates containing details about available investments, similar to how modern brokers operate today.
These moneylenders also swapped debts among themselves. For example, if a lender wanted to get rid of a risky, high-interest loan, they could trade it for a different loan from another lender. At some point, they began to offer debt issues to independent investors.
Fast forward to 1602, the first modern securities market known as the Amsterdam Stock Exchange was born. This securities market was mainly used for the exchange of commodities.
However, after the establishment of the Dutch East India Company on the 20th of March 1602, equities started trading and the Amsterdam Stock Exchange began to act as a secondary market to regulate the buying and selling of these shares.
In 1698, the first evidence of an organized exchange of securities in London arrived when John Castaing began to use Jonathan’s Coffee House as a place to post stock and commodities prices.
After the Jonathan’s Coffee House was burnt and rebuilt, a club consisting of 150 brokers erected another building in Sweeting’s Alley and named it the New Jonathan’s in 1773. After a while, the New Jonathan’s became the Stock Exchange and now it is known as the London Stock Exchange.
From the 1700s until now, other stock exchanges like the Paris Stock Exchange, Philadelphia Stock Exchange, New York Stock Exchange etc. began to spring up.
Modern Investing and the Arrival of Stock Indexes
Many people believe that the First and Second Industrial Revolutions played a pivotal role in the development of today’s banking and investing.
During this period, there was surplus cash, and people began to save money, leading to international investing and the establishment of big financial institutions and firms like Goldman Sachs, Lehman Brothers, and JP Morgan.
However, measuring the performance of different Stocks was complicated and this led to the development of the first security market index by Charles H. Dow and Edward D. Jones in 1884.
The first version of this stock index was created by calculating the average value of the top 12 stocks across vital industrial sectors such as railroads, mining, and steel mills. This index was initially known as the Railroad Average.
Over time, it evolved into the Dow Jones Transportation Average and eventually transformed into the widely recognized Dow Jones Industrial Average.
Today, we have many advanced stock indices like the NASDAQ Composite, Financial Times Stock Exchange (FTSE) 100 Index, Russel Indexes, and Standard & Poor’s 500 (S&P 500), averaging hundreds of stocks globally.
Investors rely on these indexes as a foundation for shaping their portfolios or engaging in passive index investing strategies. This has led to the creation of tools like the ES futures chart, which you can see here, which investors use for assessing the fluctuations and performance of specific market segments.
So, instead of the complicated process of measuring the performance of individual stocks in the past, investors can now use these live futures charts to track financial instruments like commodities, financial futures, and indices in real-time.
Afterward, they can choose to try to predict future price changes by securing positions in ES futures and making some profit if the future price changes go as they speculated.
The stock market has gone through several ups and downs and evolutions, including controversial crashes like that of 1929, which led to the Great Depression.
Following the misfortunes of the stock market, regulations like the Securities Exchange Act of 1934 were enacted to govern the secondary trading market. These events have shaped the way money is saved and invested.
Is a New Era of Investing Upon Us?
Presently, investing is more accessible than it was in the past, with so many investment products like bonds, ETFs, stocks, mutual funds, currencies, futures, real estate, etc. However, the internet, Artificial intelligence, blockchain technology, cryptocurrencies, etc., have the capacity to further transform the way we invest today.
Recently, McKinsey interviewed some institutional investors who all agreed that present global investment conditions have changed in the last three decades.
According to these investors, shifts are bound to occur across five domains namely: demographic forces, technology platforms, resource and energy systems, capitalization, and world order.
With these looming changes, institutional investors are redesigning their strategies in areas like portfolio construction, proficiency, and purpose.