Stock (or share) which is sometimes known as equity is a claim to partial ownership or holdings of a firm.

Initially, the original owners of a firm sell their shares or stock to gain additional funds to finance the firm expansion which can be said as the owners sell part of the ownership of the firm to the stockholders. This is known as the Initial Public Offering (IPO). After the IPO, the stocks can be sold and resold by the stockholders in the stock market with the aim of gaining profitable returns through the price differences of the stock.

Stock prices are determined through trading on a stock exchange such as NASDAQ, S&P 500 and DJIA. Generally, stock prices reflect investor expectations for future corporate earnings and thus reflect for future economic growth.

2. The Origin of the Stock Market

The stock market originated in Europe prior the industrial revolution in the 1700s. Many traders in the market wished to make investment in huge businesses but this could not be affordable with a single trader. Thus, they gathered their funds together to invest in a new business as partners (Grazian, 2008). This is similar to the practice of shares nowadays and has inspired the origin of the stock market.

In the beginning, the stock market trading started on an informal note. The traders met at coffeehouse which was used as a market place in the 1700s. The first exchange was created in Philadelphia during 1800 and in New York during 1817 and finally the trading rules were formed (Grazian, 2008).

In the United States, the first stock exchange took place in Philadelphia over 220 years ago which was known as the “Board of Brokers” and the Board met at the coffeehouse. The Board of Brokers was later changed into the Philadelphia Stock Exchange in 1875 and it is now included in NASDAQ as NASDAQ OMX PHLX. The market became more structured without manipulative auctions and a fair commission structure was formed. The group of stock brokers was reorganized and known as the “New York Stock and Exchange Board” in 1817 (Terrell, 2006).

In 1896, the Dow Jones Industrial Average (or the Dow) created by Charles Dow and one of his business associate, Edward Jones was first calculated. Along with other stock market index, such as NASDAQ and S&P 500, the Dow is one of the most closely indicator to track the stock market activity. Besides the Dow, S&P Dow Jones Indices also determined the S&P 500 in 1957 (Standard and Poor’s, 2009). The S&P 500 is more preferable than other stock market indices as it is determined through a more diverse constituency and weighting methodology with 500 stocks chosen for market size, liquidity and industry grouping. It is recognized as the best representation of the U.S. stock market and also classified as a leading indicator for the U.S. economy. Thus, the stock indices from the S&P 500 were used as the data in this study.