Episode #4 - A Brief History of the Stock Market
Announcer: Welcome to The Money Clip podcast series from The Vault, Scotiabank’s online guide to helping Canadians get ahead financially. Listen in to gain a deeper understanding of your personal finances and find out how a few small changes to the way you manage your money can make a big difference.Michael Seaton: Thank you for joining us on our second Money Clip podcast series from Scotiabank. I’m Michael Seaton, Editor of The Vault program, which provides Canadians with a deeper understanding of personal finance and money related matters. With us today is Fred Ketchen, Director of Stock Trading for ScotiaMcLeod. Fred is here to shed some light on the always-interesting subject of the stock market. This is Part 1 of 3, and in this first segment, Fred will help frame the topic with some history and background. Before we begin, we would love to hear from our listeners. Information on how to reach us with questions and comments will be provided at the end of the show. So welcome, Fred, and thanks for speaking with us today. Let’s start by taking a look at the origins of the stock market. Where and when exactly did the first stock market open and what role did the market play at that point?
Fred Ketchen: Well, Michael, the first stock market in the world was in fact in Antwerp in Belgium. It started in 1460 under the rule of Philip the Good and he was the son of Duke John the Fearless. Philip’s court was the most splendid in the Western Europe area at the time. He was succeeded by his own son, Charles the Bold—they had great names back in those days—and that happened in 1465, but not before substantial expansion of the territory he governed and notable growth in the area’s business environment had taken place. The Antwerp Stock Exchange traded financial securities, primarily bonds, but there was the odd equity related issue that was posted for trading at the time.
Michael Seaton: Who were the first investors in that stock market?
Fred Ketchen: Well, the first investors were generally rich landlords or landowners and, sometimes, both; the gentry of the day, I guess we might say; the people who had set up businesses, primarily to trade with France and England. To build, renew, and modernize, these folks needed some capital and thus, the stock exchange was formed to provide that capital.
Michael Seaton: Interesting. So if we look a little closer to home, what was the first stock market to open in North America, and when did the Canadian market open for business?
Fred Ketchen: Well, Michael, the first stock market in North America was, of course, the New York Stock Exchange. It was established back in 1792 when the so-called “Buttonwood Agreement” was signed. Several brokers agreed to trade securities for a fee and that kind of trade had been taking place on the sidewalk around this buttonwood tree, thus the name of that agreement. In the beginning, only five securities were listed on the New York Stock Exchange; three of them were government bonds, which had been created to finance the Revolutionary War. The other two were bank stocks. Bank of America was, in fact, the first stock to be listed. And based on the number of companies listed for trading, the New York Stock Exchange is the sixth largest in the world. Now, here in Canada, the Montreal Stock Exchange began in 1832 at the Exchange Coffee House as an informal stock exchange. The formal agreement wasn’t signed until 1874. The Toronto Stock Exchange started in 1852 when an association of brokers was formed, and it became a formal agreement in 1861, at which time there were eighteen stocks trading on our exchange. In 1914, because of World War I, the TSE closed for three months. By the end of the 1920s, the TSE was trading more than ten million shares a year, and in the mid-1930s, the Toronto Stock Exchange merged with the Toronto Stock and Mining Exchange and the two of them became one. The Mining Exchange was closed down and I can tell you, that when the last day of trading—I have heard from people who were there—apparently there were pigeons inside the building and someone took their rifles and looked after the pigeons. The Stock Exchange building at 234 Bay Street in Toronto opened in 1937 amid much fanfare. Much more modern, the most modern in the world, as a matter of fact. And then, of course, we had the implementation of the Computer-Assisted Trading System known as “CATS”, and that was brought about because of space limitations—and the first one in the world in 1977.
Michael Seaton: Excellent. In terms of understanding today’s environment, when I look at the stock market in the business pages, it’s obviously a bit different than when we started out. I see a different number of indices and sub-indices like the S&P/TSX composite, and the S&P/TSX 60. What do these represent, and can you give us a little bit of background on that?
Fred Ketchen: Well, it is an index that is designed to show investors whether the market is strong or whether it is weak. And in the current S&P/TSX composite index, there are about 265, 270 different companies represented in that index and depending upon what happens to the shares of each one of those in any one period of time, will help them calculate—which they do, of course, by computer now, as opposed to by hand as it used to be—to calculate whether in fact the market is up or whether it is down. Now, in that composite index, you’ve got all these 265, 270 companies but they are then segregated into what we call “sub-index” groups. So you get the mining group, you get the technology side, the industrials, the materials, the telecoms, the financial services, and so on. So that you know from those, after they calculate the changes that have taken place in those sub-index groups, just what market area is performing best, what market area is performing worst.
Michael Seaton: Well, that’s great. That covers off my next question about the energy and information technology sub-indices and how they’re related to the overall stock market. Maybe you could comment just on how when we hear the S&P/TSX composite has gained two percent, or as we saw this week with the losses in the wake of the income trust announcement, what exactly does that mean to the average investor?
Fred Ketchen: Well, it’s nothing more than information about a direction of the market—that is, the overall direction—of the market. And maybe some days you’ll have more stocks that are down than are up, and that way would sort of indicate that we got pressure on our market because there have been more aggressive sellers than there have been aggressive buyers. On the other hand, sometimes you can’t look at a composite index and all of a sudden assume that everything is falling apart because it may be one segment that is falling apart. As we have seen, more recently, one segment of our market was extremely weak, put a lot of pressure on our market, but when you really looked underneath that, there were substantial strengths, as a matter of fact, in some sectors, most notably the golds and the financial services side.
Michael Seaton: Great. And how does Canada’s stock market rank in relation to other markets? Are there real key differences between our stock market and that, let’s say, of the United States?
Fred Ketchen: I think that there are some very significant differences between our two markets. The US market, of course, is very large and it is well represented by a wide variety of different kinds of companies. But they do not have the same influence from the companies that are listed there that we do, because we have many, many more natural resource companies, whether they be gold companies, whether they be the mining companies—that is the things like nickel, copper, lead, zinc, and so on—and, certainly, the energy sector. Canada is a huge supplier of energy, and as a result, that plays a very large part in the influence within our market, which you don’t see in other markets. So when we have a big natural resources market, you will see that more influential in what happens to the Toronto Stock Exchange index than you will to what happens in the US.
Michael Seaton: Excellent. And we started by talking about the origins of the stock market. Have the markets changed over time—and maybe not from way back when, but in the recent history?
Fred Ketchen: Well, going back to the time, for instance, maybe in the mid-1930s now, here in Toronto, the market was obviously much smaller than it is now. We might have traded maybe ten million shares in a period of a year. Well, things have progressed because pension funds, mutual funds, those kinds of things—the large investors have become so much larger. People know more about the principles of investing, the advantages of investing wisely, and therefore, we might trade ten million shares here now in the matter of five minutes. And so the market has become so much larger. The participation in our market is no longer limited only to those people who have a little bit of money put aside. As a matter of fact, more and more people have entered our market and become investors because they have RRSPs, they want to save for their retirement, they have excess funds that they want to see grow. People are much more sophisticated in financial affairs now than they ever have been and you can see that in the kind of activity that we have seen in this growing market. So, much larger, much more sophisticated, much more computerized, as a matter of fact.
Michael Seaton: Excellent. And I want you to hold that thought on the computerization and the access for the average individual; we’re going to bring that back up in Part 3 in a little bit more context. Now most of us have an image of stock and bond traders frantically screaming instructions in the pit of a stock exchange. Does this still happen, or is everything now done by computers?
Fred Ketchen: Not everything is done by computers; it does happen to a certain degree. Now you mentioned stock and bond traders. Bond traders—they never did have, particularly, a trading floor in more recent years for bond traders. Bond traders were people who sat in banks’ offices, trading offices, particularly investment dealers’ offices, and they generally conversed by telephone and did their deals by telephone. And this is one of the great aspects of this business, because you learn very early that your word is your bond and that is meant in a very, very serious way. Once you commit yourself to a transaction, you’re expected to live up to that, and if you don’t, there are serious consequences. On the other hand, stock trading, well, it has been an exciting business, a colourful business, and a noisy business, as you will have seen from images that we have witnessed in years past. We had a large trading floor, for instance, here in Toronto; there was a large trading floor in Montreal; there still is a trading floor in New York. Here, we have graduated from all that real-estate space and we have gone totally computerized. In the US, they’re coupling the open outcry system with, in fact, what we’re seeing on the computerized side. So there’s involvement in both of those. And I would suggest that maybe within—I’m going to stick my neck out now, Michael—within maybe five, ten years, somewhere along the way, the New York Stock Exchange will close down as most of stock exchanges around the world have done and they will go totally computerized.
Michael Seaton: Very interesting. And that brings up our last question in this first series, Fred, and you just touched on a little bit of it in terms of the trading floor, but how do you see the stock market overall evolving from where we are today?
Fred Ketchen: From what I can understand and the things that I see, and when you compare it with what you have seen over the last few years particularly, in my opinion, the level of computerized trading and the technology will grow even further, there will be more specialized trades that take place, more programs that are put together, options, and these kinds of things, hedges, whatever. You know, the more computerized work you get on this, the more opportunities you get to offset one area of the market with another area of the market by hedging and so on. Certainly I expect that with the knowledge of financial affairs, particularly bonds, stocks, what banks are for, the accumulation of money, retirement; and as our population continues to age, I would think that the growth that we’re going to continue to see in our stock market is going to be extremely substantial and it will move that way, as far as I’m concerned, for several decades to come. Simply because you’ve got that younger generation behind the older generation, the older generation with all the money eventually will pass down a lot of that money to their younger generation, who will expand on that. So I think the growth is going to be rather enormous.
Michael Seaton: And we’ll see new highs like we’ve just witnessed lately.
Fred Ketchen: We will indeed. I think that with the economy here in Canada, the economy of North America, altogether with the economy of many parts of the world, the idea is you keep your economy expanding and as your economy continues to expand, there are more riches, more wealth, more wealth finds its way into the market, so that’s where we’re going to get some growth from.
Michael Seaton: That’s great. Very interesting stuff. Thank you very much Fred for being here with us on our first episode with you on the stock market. That will wrap up Part 1 in our series and we appreciate you sharing your insights and we look forward to next time on Part 2. Thank you to our listeners for joining us on The Money Clip podcast series from The Vault at Scotiabank. And we hope you will join us next time.
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