During the late 1500’s merchants were transporting goods from many corners of the earth for sale on the local markets of Europe and England. Financing such voyages was a risky venture as were the voyages themselves. Some ships didn’t return after mutinies, pirates, navigational mistakes, storms, and sometimes even belligerent natives took their toll.
Merchants soon realized that they could lower the impact of such events on their personal wealth by funding a voyage with the help of investors. In this way, an individual or merchant could be involved in a number of voyages to various places. The loss of a ship every now and then need not be a major catastrophe (unless you happened to be a sailor!).
The first company to finance such expeditions through the sale of shares was the Indian Oriental Company founded in Amsterdam in the early 17th century. In 1611 a building was set aside for the purpose of trading shares in Holland and so the first fixed stock exchange came into being. This building became the scene of the first major financial transactions in shares. Stock was traded prior to this, but the markets tended to be loose gatherings of investors. In fact, the world’s first joint stock company, the Muscovy Company, was founded in England in 1553. Stocks in these companies were traded through brokers in coffee shops, docks and alleyways.
In London, Exchange Alley (Change Alley for short) runs between Cornhill and Lombard streets. Today you can see a plaque on the Alley wall indicating the exact location of Jonathan’s Coffee House, one of the main meeting places for the stockbrokers of the day.
Shares simply represent a proportion of the ownership of a company – the key vehicle of trade and merchant activity of today. Risks still exist of course although they’re a bit different. We now have strikes, corporate raiders, regulatory and project glitches, natural disasters, and a whole host of international risks – it appears some things have not changed all that much over the centuries even if others have.
The stock exchange is simply the place where people exchange ownership of shares and for businesses to raise capital (called a ‘float’). To trade on the exchange however, one must be a member. There are rules and regulations to maintaining membership, not to mention a cost. Members who offer to conduct share trades for the public are called brokers. As private citizens, we can only trade through a broker, unless we purchase a seat on the exchange.
Today, brokers around the world execute orders via computer connections to the stock exchange’s trading computers. The systems allow automatic processing of orders directly onto the market. This is a more efficient system than the phone calls and the ‘on-floor’ shouting auction style process that operated in the past.
Along with computer-based markets, exchanges have developed systems of electronic registry of ownership. This replaces the old paper share certificates. Although share certificates looked and felt like money, were often quite ornate, and so were ‘comforting’ to hold – the electronic system is far more efficient. Share certificates could be lost and delivery or replacement from the company registry used to take weeks. With modern systems, registry of ownership is immediate.
Most brokerage firms run, or have agreements with cash accounts through which clients may pay for purchases and funds are deposited. These operate much like a bank account and pay interest at a rate a little better than the average bank account. Anyone can open an account through a broker, even though the funds may never be used for buying and selling shares.
Banks also operate brokerages and offer much cheaper brokerage rates for online transactions. This is a common way to trade shares and it’s so simple. All you do is open a trading account at your local bank. You will receive an account name and password and you’re away. Simply log on with your personal computer and place your orders.
One of the biggest changes today is the impact of technology particularly for those who would buy and sell shares. Personal computers and the internet have opened up fantastic opportunities for anyone to trade and invest in shares with a very high degree of safety. That’s something of which most people are still completely unaware. While many “lost their shirts” in 2008, there were others who were fully prepared and indeed made a lot of money from shares that same year.
The difference is, of course, knowledge. Most surprising is the fact that it’s not at all complicated. It’s human nature to complicate things and that’s certainly true when it comes to investing and trading in shares. However there are tried and true methods readily available that are so simple most people can master them with ease.
To give you some idea of how this is done, the trading records of all stocks and currencies can be used by a computer to produce charts. These can be seen on a screen with a click of the mouse. Quality charting software comes with many tools and indicators as standard, many more than you will ever need unless you wish to become a specialist in some complicated aspect of trading.
The charting software can be set up so that it automatically displays certain tools on the charts as it moves from chart to chart, stock to stock, and all we need do is keep an eye out for any showing the correct patterns. Our tools do this for us. When we see one, we move it to a special folder (just a click of the mouse) for closer examination later. Patterns tell us when the price is preparing for a significant move.
It’s usually fairly quick and easy to find several charts that are of interest. Then we check our selections each day, lying in wait so to speak, for the “signal”. We need to do this because, as the appropriate patterns form, we cannot initially be sure which direction the move will take. Obviously we don’t want to buy a stock just as it begins to accelerate downwards. When the move appears to be clearly upwards, we can enter a long trade.
A long trade is one where we buy at a low price and sell later at a higher price. By contrast a short trade is one where we make money as the price falls. This is best understood as trading backwards or upside down. I don’t advise attempting short trading until you are quite proficient at trading long. The key point to grasp here is that we use the exact same simple tools in the exact same simple way to identify long or short trades. By the way, none of this refers to “day trading”. That’s reserved for the super heroes.
Before the internet, cheap personal computers and quality charting software became available, which was really only a few short years ago, trading this way was almost impossible and extremely time consuming. The fascinating thing is most people still have no idea and won’t even look, such are the misconceptions. If they did they’d be shocked at what is available today. Interestingly young people are rarely burdened by their elders’ misconceptions and they’re not afraid of computers. Some still in high school or not much older are into trading and doing very well indeed. For these youngsters the future is bright indeed.