A Brief History of the European Stock Market

From the Forum Romanum to the Frankfurt Stock Exchange

history stock market

When we think of capital, we think of money that’s supposed to produce more money in the future. It’s a kind of surplus that’s expected to produce more surplus. But for centuries, the concept of making money out of money was considered a moral no-no. Ancient philosophers like Plato and Aristotle shook their heads at the idea, and later, in mediaeval Europe, Thomas Aquinas declared it “unjust and unlawful” to “sell a thing dearer or buy it cheaper than it is worth”.

Despite the lofty criticism, capital markets have flourished throughout human civilisation. Society has always had a practical need for capital to stimulate economic activity. Banking, in the form of lending money at interest, is perhaps the earliest expression of this phenomenon. But it’s different from the later invention of the stock market. Unlike traditional banking, which involves a borrower and lender, the stock market involves many independent participants trading shares in companies. It allows people to speculate with a high degree of risk in a company’s ventures and to share in its potential profits, often without much security.

But when we talk about the stock market today, our minds tend to turn to Wall Street and iconic American companies such as Coca-Cola. But the true birthplace of the stock market lies on the other side of the Atlantic. Surprisingly, stock exchanges and trading places flourished in Europe for almost two millennia before making their way westwards across the pond.

1. Ancient Rome: The world’s first shares

Giovanni Paolo Panini A Capriccio of the Roman Forum
A capriccio (architectural fantasy) of the Roman Forum, Giovanni Paolo Panini (1691–1765)

Historians have long debated when shareholder companies first appeared. It has been argued that the earliest traces of their existence can be found in the Roman Republic of the second century BC. During this period, following Rome’s geographical and economic expansion after her victory in the Punic Wars, an extensive system of private-public cooperation developed to support the expanding republic’s growing administrative needs. To meet these needs, the state created a contract system, whereby government leases were auctioned off to private entities, similar to how modern governments allow private entities to bid for contracts. 

At this juncture, the societas publicanorum, or “publican societies,” emerged as essential players in fulfilling state contracts. The publicans were professional groups of equestrian businessmen with considerable capital, expertise and manpower who took responsibility for carrying out state projects and meeting the demands of Roman expansion. Rome relied on these business organisations for governance and to carry out public tasks such as road building, mining, fishing and, most famously, tax farming. For the publicans, it was a business of margins, as they would try to make more money from the contracts they were given than they had bid for.

forum romanum publican societies
A reconstruction of the Forum Romanum where share-like contracts supposedly exchanged hands in antiquity. Hermann Bender (1844-1897), Public domain, via Wikimedia Commons.

Corporate structure of Rome’s societates

The background to the rise of the publicans lies in the enormous amount of wealth accumulated in the hands of the Roman elite in the aftermath of the Second Punic War. This newfound surplus created fertile ground for investment capital to emerge and be channelled into large commercial enterprises. As part of this development, private individuals joined forces to establish business groups known as publican societies, which served as an early prototype of partnerships in modern legal terms. 

A societas was made up of several partners, called socii, who had rights and obligations to each other under a private agreement, and similar to modern partnerships, profits and losses were shared according to each partner’s share of ownership. Managers oversaw the activities of the societas, prepared public accounts and held regular general meetings. A societas also had a director, called the manceps, who played a crucial role in the company and acted as director on behalf of the other partners. He was also responsible for bidding on contracts and serving as a praes, or bondsman, by offering his personal property as collateral to ensure contract fulfilment.

The financial support of the socii was crucial for the manceps to overcome the considerable costs associated with bidding for government contracts. All the socii made financial contributions to become partners of the manceps, but not all offered personal property as collateral beyond their initial investment. Contributions and shares therefore varied between the socii, with those who contributed more capital assuming greater risks and receiving a proportionate share of the profits. Once a public contract was awarded to a company of publicani, executive power shifted from the socii as a whole to a smaller group known as the magistri, who functioned as modern board members and were elected annually, probably by a general vote of all the socii.

Roman stocks and stock trading 

The societas publicanum had many of the characteristics we associate with modern business partnerships. Assets were not owned by the company itself, but collectively by the socii on the basis of their individual shares. However, the most symbolic step towards the development of the modern company or corporation was the existence of shares and shareholders. Cicero tells us that citizens could own partes, or shares, in the publican companies. He mentions the existence of large shares, known as magnae partes, held by executive shareholders, as well as smaller shares, called particulae, which were more widely held.

Furthermore, shares were tradable, i.e. they could be bought and sold between unrelated parties, and there was a designated trading place near the Temple of Castor on the Forum Romanum. Interestingly, Cicero notes that investing in shares was seen as a risky business that conservative men tended to avoid. Dealings in foreign currency, or forex trading, was also common on the Forum, as there was a high demand for facilitated transactions between merchants and traders.What makes Roman partes look even more like modern shares is the mention of variable share prices. Cicero writes of shares with high prices at certain times, suggesting that the value of shares depended on the success of the company and that they could fluctuate, similar to stock prices today. The presence of such terminology, and the similarity to Wall Street jargon, has led historians to believe that there was a sort of stock market life in ancient Rome, further emphasising the similarities between the societas publicanum and modern shareholder companies.

2. Italian city-states

However, it was not until much later that a genuine capital market would develop in Europe. During the 13th century, Venice and Florence were among the first city-states to offer government bonds that could be bought by the general public. The Venetians, for example, needed capital to finance their war against the Byzantine emperor and his Genoese allies. So they sold bonds that guaranteed a fixed maturity date and an annual rate of return (or a coupon if you like).

These were among the first “securities” in Europe, and even though they did not trade on an exchange, there was still a demand for them. And it didn’t take long for this public debt to migrate into secondary markets. These markets were dominated by specialist bond brokers, who arranged deals between buyers and sellers from their “trading desks” (actual wooden desks) and collected a commission for their services.

3. The Dutch East India Company

But many people point to the Amsterdam Stock Exchange (modern Euronext) as the first modern stock exchange due to its sophistication. It began as a commodities market (a place to buy and sell physical things) before expanding into a securities market in 1602 for investors to buy shares in the Dutch East India Company.

Founding charter of the VOC (1602)
World’s first IPO: Founding charter of the Dutch East India Company. Dated March 20, 1602. Source: National Archives, The Hague, Netherlands.

The Company offered transferable shares, and buyers began to trade them immediately. Quickly a speculative short-term trading frenzy developed around the city. Traders were conducting all kinds of sophisticated transactions, including futures, bull and bear raids, shorting, which famously culminated with the Tulip Mania. By the end of the century, the methods employed in Amsterdam were as sophisticated as any we use today.

4. Stock trading in Europe today

Just as the Dutch merchants issued the shares to fund their expeditions, modern businesses do the same to finance their operations. When a company goes public, it sells shares in itself on a stock exchange, and anyone who buys them becomes a part-owner of the company. Investors, looking for a place to grow their money, can trade these shares on an exchange through a broker, almost like how shares were traded through specialist dealers back then.

euronext hq amsterdam
Amsterdam Headquarters of Euronext, currently the largest pan-European stock exchange offering clearing, settlement, and custody. Source: SourBootuitjes, CC BY 2.0, via Wikimedia Commons.

The first pan-European online broker was Saxo Bank, followed by DEGIRO, Swissquote, in addition to Interactive Brokers which offered its services from the US to European clients through its UK entity. More has followed since then, and today the amount of stock brokers available is incredible.