Stock exchanges exist for companies to raise money by allowing the public to participate through shares trading.

When you distill the process down to the core, think of the bourse as your local store. You buy 20% of the equity and the store owner will take that money probably to open up a new store. For each one dollar profit, you get two cents. But what were stock exchanges invented in the first place? What did the founders had in mind?

Now in the US, you have to go back 200 years (Belgium probably was the first to do it in the mid-1500s). The first to be established was the Philadelphia Stock Exchange in 1790. But then the Buttonwood Agreement changed the landscape and allowed the NY Stock Exchange—synonymous with Wall Street–to be the dominant market place. The Buttonwood Agreement was forged by 24 bankers supposedly to stabilize the market. In 1792, or mere two years after the Philly bourse was established, there was a financial crunch and the market panicked. Before stock exchanges, trading was dominated by auctioneers and brokers. There were a lot of contracts that were not honored, and deals reneged.

The lack of regulation and screening seemed to be a major culprit. Companies can just sprout out of nowhere and offer stocks on a massive sale. As a result, people made a lot of money and yet refused to pay back the investors. It was very difficult to tell apart the legitimate ventures from scams.

The founders of stock exchanges wanted to lay down some ground rules in investing and trading money. Some may argue that if the bankers did not sign the Buttonwood Agreement, there was no way for the economy to survive the chaos. Apart from the safeguards, it was really meant to boost the confidence of the people on the market.

The whole problem started with William Duer, who speculated on the market and hedged the money that he borrowed from everybody else, refused to pay his obligations. Understandably, because people think that loan repayment could not be guaranteed then it was better that they hold on to their cash.

The stock exchange was actually very exclusive, unlike the stock exchanges of today. Brokers and bankers lent each other money and the club was a sort of guarantor that the money will be paid back. They can secure a loan outside of the club but they have to get priority to the other signees. It`s exactly like a “scratch-your-back, scratch-my-back” kind of deal.