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 have in mind?
Now in the US, you have to go back 200 years (Belgium presumably was the first to do it in the mid-1500s) (Belgium probably was the first to do it in the mid-1500s). The first to be created was the Philadelphia Stock Exchange in 1790. But then the Buttonwood Agreement transformed the environment and permitted the NY Stock Exchange—synonymous with Wall Street—to be the main trading place. The Buttonwood Agreement was created by 24 bankers reportedly to stabilize the market. In 1792, an only two years after the Philly bourse was formed, there was a financial crisis and the market panicked. Before stock exchanges, trade was controlled by auctioneers and brokers. There were a number of contracts that were not fulfilled, and transactions reneged.
The absence of regulation and screening seems to be a key problem. Companies may simply emerge out of nowhere and issue stocks on a vast scale. As a consequence, individuals earned a lot of money and still refused to pay back the investors. It was quite difficult to distinguish apart the real businesses from frauds.
The founders of stock exchanges intended to put down certain basic rules in investing and exchanging money. Some may claim that if the bankers did not sign the Buttonwood Agreement, there was no chance for the economy to survive the instability. Apart from the precautions, it was actually aimed to improve the confidence of the individuals 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, refusing 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.