The evolution of the Canadian stock market.
Curious about the origins of modern stock markets? You’re in the right place. Today’s blog covers Canadian stock market history, beginning with the very first stock exchanges (a LONG time ago) and leading up to the 2020 pandemic.
Stock markets have evolved from simple exchanges where wealthy people could invest their money into complex financial markets that just about anyone can access. Trading used to be very time consuming because there was no technology, so you’d have to physically seek out someone to trade with. Because of this, trading was mostly done by the rich — wealthy people would have the resources to get involved in trading and know where trades were taking place. Still, there weren’t nearly as many investment choices as there are today.
Now, just about anyone can trade in the stock market, thanks to the internet and the introduction of fractional investing and zero-commission trading (I mean, that’s exactly what Flahmingo is all about).
First of all, why is it important to know stock market history?
In general, knowing how the stock market works is super important for anyone who plans to invest – that’s why we wrote a blog explaining all the moving pieces!
The history of stock markets also shows how the stock market can affect the economy, which is important to understand because changes in the economy means changes for you and your lifestyle. For example, when the stock market and the economy are doing well, it’s easier to find a job. Also, if you work for a larger publicly traded company, stock price is usually a good indicator of how the company is doing overall (are prices moving up or down?).
Ultimately, stock market conditions have real-world effects – and history is a great place to look for examples of how everything ties together.
The very first stock exchanges
The concept of trading goods goes back to some of the earliest civilizations, but the earliest stock exchanges date back to 1531 in Antwerp, Belgium.
These very early exchanges didn’t look exactly how the stock market looks today. For one, they didn’t have a dedicated space like a trading floor. However, brokers and lenders would still gather to handle business, government, and even individual debt issues.
Also, although we refer to these exchanges as a stock market, there weren’t actually any stocks involved. Traders mostly used promissory notes, which are written promises to pay a specific amount of money at a certain date, and bonds, which are loans like promissory notes but they usually have more conditions for repayment.
When did stock exchanges start actually using stocks?
By the 1600s, actual stock exchanges started to take form when merchants from Britain, France, and the Netherlands wanted to pay for voyages to India and other countries in Southeast Asia. Sailing the Indian Ocean was a very risky and dangerous journey that often resulted in ships being lost along with the ship owner’s fortunes, so they would seek out investors to finance their voyages.
What we would consider limited liability companies (or LLC’s) were formed to raise money from investors, who received profits of varying amounts based on how much they invested. These companies also helped with risk management because they prevented creditors from coming after the investor’s fortunes if a ship didn’t complete the journey – nothing more than their initial investment amount could be seized if the journey failed (hence, limited liability).
Investors would put their money into more than one journey at a time, since these voyages were risky and often didn’t return. They were essentially doing what investors do now – reducing risk by diversifying, or spreading their risk across multiple investments. These companies, which all included East India in their names, essentially issued stock that would pay dividends based on the profits of the journeys the ships made – making them some of the first modern joint-stock companies.
Joint-stock companies are businesses owned by investors (they’re what we had before modern corporations). The number of shares an investor owns determines how much of the company they own, and owners of a joint-stock company receive a part of its profits. Joint-stock companies make it easier to finance expensive ventures, like large fleets.
Coffee, with a side of stocks
For at least 400 years, shares were issued on paper, which made it possible for investors to trade with other investors, but they had to physically seek each other out because there weren’t regulated exchanges at the time. In the 1600s, most brokers and investors in England did their business in coffee shops around London with flyers posted in the shop’s window or mailed as a newsletter. This paved the way for modern stock exchanges – I mean, we still get coffee and do business at the same time.
North American stock exchanges
In the late 1700s, the first stock exchange in the United States was founded in Philadelphia. Shortly after, the New York Stock Exchange (NYSE) – now the largest stock exchange in the world – was founded. By the mid-1800s, Canada had gotten in on the action and the Montreal Stock Exchange and Toronto Stock Exchange (TSX) were founded.
The Toronto Stock Exchange (TSX)
The TSX is one of North America’s oldest and largest stock exchanges and Canada’s main stock exchange. A stock exchange exists mostly to serve as a central meeting place for investors to find companies in need of financing. Exchanges list the prices of available stocks and other securities. Investors then purchase these stocks, which allows the company to raise money and grow its business – and in return, the investor may receive interest income, dividends, and even voting rights for the company. Investors can also day trade (buy and sell securities throughout the day) and profit when they sell their shares for more than they bought them for.
When the TSX first opened, companies paid $250 for a “seat,” which allowed them to list stocks on the exchange. Only about 18 stocks were listed on the TSX in 1861. By the early 1900s, the price for a seat rose to $12,000 and trading volume was up to a million shares per day. By the 1950s, the price for a seat was up to $100,000.
Stock trading became more and more popular during the 1900s and the exchange had to move offices to accommodate that. The first move was in 1878, but the TSX moved 4 more times until it settled in its current location in the Toronto Exchange Tower in 1983.
The TSX was the first stock exchange to introduce computer-assisted trading and eventually go completely electronic for trading, eliminating the trading floor in 1997. It also was the first exchange to have a female president, Barbara G. Stymiest, who oversaw the restructuring of several major Canadian stock exchanges into one exchange, as well as the transition of the TSX into going public (meaning the TSX traded its own shares).
The TSX is now the eleventh-largest exchange in the world and third-largest in North America, listing just under 1,749 publicly traded companies as of December 2021. For comparison, the largest stock exchange in the world is the NYSE and listed around 2,500 publicly-traded companies as of March 2021.
Notable stock market crashes
Stock market crashes usually happen because of panic after a catastrophic event (like a natural disaster, economic crisis, or pandemic). Investors rush to sell shares they own because they believe these catastrophic events will negatively affect the financial future of the companies they invested in. When there are more people trying to sell than there are people trying to buy (a.k.a. supply exceeds demand), prices drop. There have been a few notable stock market crashes in history, with the most recent being in March of 2020 as a result of the COVID-19 pandemic.
The crash of 1929
One of the earliest stock market crashes was the stock market crash of 1929. The day that share prices on the NYSE completely collapsed (October 29, 1929) is called Black Tuesday. The crash didn’t only affect Wall Street; Canada was also affected. Prices fell incredibly fast, and people rushed to sell their shares, which was difficult because there weren’t enough buyers. Many Canadians lost their fortunes, businesses laid off huge amounts of workers, and it took over a decade for the economy to recover.
Leading up to the crash, stock prices were growing quite quickly – which encouraged many investors to get involved.
This phenomenon is called a speculative bubble, and is typically what happens before crashes. Basically, there is a period of growth that stimulates more and more people to buy stocks…and then the bubble eventually bursts. The problem is, it’s incredibly difficult to tell when a speculative bubble is happening until it bursts.
The COVID-19 pandemic
In early 2020, the onset of the COVID-19 pandemic wreaked havoc on financial markets all over the world and Canada was no exception. The pandemic destroyed earnings forecasts for many Canadian companies and as a result the S&P/TSX Composite Index (we’ll explain what this is in a minute) dropped by 37% between February and March of 2020, which was the index’s lowest point ever. That’s a drop of about $1 trillion in the value of the companies that make up the index. More surprising than that drop, global stock markets, including the TSX, had recovered most of their losses by the end of August 2020. In early 2022, the S&P/TSX Composite Index reached an all-time high.
Canada’s first stock market index
Market indexes can provide a look into stock market history. An index tracks the performance of a bundle of stocks and indicates the health of whatever market the stocks belong to. Indexes can be specific to an industry or sector or track the stock market overall. When an index is high, that means the shares of the companies it’s tracking have increased in value.
The term “stock market” generally refers to one of the major stock market indexes, like the S&P/TSX Composite Index in Canada or S&P 500 in the United States. If you hear someone say the stock market is up or down, they’re usually referring to that index moving up or down.
The S&P/TSX Composite Index
The S&P/TSX Composite Index has a few purposes including:
- Providing an overview of how the Canadian stock market is performing.
- Offering fund managers a benchmark to compare their portfolio performance against
- Being a benchmark that ETFs and index funds can follow
In 1977, the TSX launched the TSE 300 Composite Index, which tracked 300 of the most influential stocks on the exchange. In 2002, the name of the index was changed to the S&P/TSX Composite Index after the American financial service company Standard & Poor took over. The types of companies in this index have changed a lot throughout the years, with mining and oil companies dominating in its early days, but things shifted in the 21st century as many resource companies were removed and non-resource companies were added.
The S&P/TSX is a capitalization-weighted equity index. We know, that’s kind of a mouthful. This just means that each company in the index is given a “weight” that corresponds to their market capitalization. Market capitalization, or market cap, is the total value of a company’s shares of stock. The higher the market capitalization, the higher weight the company will receive in the index. Basically, companies are ranked by their size and larger companies are more represented in the index.
The maximum weighting a single stock can have in the S&P/TSX is 10% and the index is rebalanced every 4 months. Some of the companies with the highest weighting in the index include the Royal Bank of Canada, Shopify, TD Bank, and Canadian National Railway.
Currently, about 250 publicly-traded companies are tracked by the S&P/TSX Composite Index out of the approximate 1,500 listed on the TSX. These companies represent about 95% of the Canadian equities market (another way of saying stock market) and about 70% of the TSX’s entire market capitalization.
As of April 2022, the total market cap of the S&P/TSX index was over $2.75 trillion USD and about a third of the companies listed are part of the financial sector, which includes banks, investment companies, and insurance companies. Other major sectors in the index include energy, materials, industrials, and information technology.
How does a company become a part of the S&P/TSX Composite Index?
For a company to be a part of the S&P/TSX index, it must meet the eligibility criteria of liquidity (how easily an asset can be converted into cash) and market capitalization. For example, companies can be removed from the index if their share prices stay below $1 for too long or if their market capitalization is less than 0.04% of the entire index.
Companies must also qualify as Canadian in order to be a part of the index. That means the company must:
- be incorporated, formed, or established in Canada
- be listed on the TSX
- file financial statements with Canadian regulators
- either have headquarters or executive offices located in Canada or have a significant portion of fixed assets (tangible assets like land or equipment that a company uses long-term to make money) and revenues in Canada
Canadian stock market regulation
There’s no one federal authority that regulates securities and trading in Canada. Instead, each province and territory has a securities commission, such as the Alberta Securities Commission. Securities regulators from each province and territory form the Canadian Securities Administrators (CSA), which is similar to the Securities and Exchange Commission (SEC) in the United States. The CSA protects investors, promotes fair and transparent markets, and attempts to reduce systemic risk (the risk of an entire financial system or market collapsing, like in 2008). Beyond being a regulator, the CSA also educates the public on Canada’s securities markets.
Additionally, Canada has the Investment Industry Regulatory Organization of Canada (IIROC), which has many functions but essentially aims to keep markets fair and regulates the trading of securities. IIROC monitors trading in marketplaces like the TSX and can set laws in Canadian securities and trading markets and enforce them with fines and suspensions.
The bottom line
Stock markets don’t exist in a bubble. They’re constantly responding to culture, technology and the economy – which we think makes stock market history all the more fascinating!
Like any history, stock market history helps us recognize patterns, so we can avoid making the same mistake twice.