5 Rules That Evolved For Fairer Trading Practices In The American Stock Market

The US market is considered one of the most stable in the world. The big reason behind it is that US stocks exude trust. Nowadays, even foreign nationals seek ways to buy US stocks.

However, this hasn’t been the case forever. It took the US many years to perfect the stock market system.

Over the years, the US had many setbacks in the stock market, including frauds and unlawful practices. It took over 80 years and numerous laws to refine it to its current, trustworthy state.

Today, most brokerages will offer you a free trading account, where you can buy, sell, or invest in stocks, securities, commodities, and more. However, before we get to the good part where the stock market transformed to its present glory, let us look at the old stock market days and the frauds that stirred up the revolution.

Stock Markets in the Past

In the early 1900s, the stock market was hardly accessible to ordinary people. It took many days to execute a single trade. Moreover, there was a massive disparity between buyer and seller bids.

Even so, many people still invested in the stock market. It provided investors with an alternative income source.

5 Rules That Evolved For Fairer Trading Practices In The American Stock Market

However, everything changed with the Great Depression of 1929. Investors lost a lot of money, and confidence in the market waned significantly. Stock markets in those days were deemed too risky for purchase due to a lot of misinformation.

Thus, only a sizable ultra-rich group of people, who could bear the losses, bought securities, and invested in the stock market. It took a long time to recover and rebuild the customers’ trust.

The Fraud that Shook the Stock Market

The US stock market that stands today was carved out of the failures of yesteryears. Let us look at the most embarrassing moments that helped to shape the current stock market.

The Great Depression of 1929

In the early 1900s, many people started investing in securities. However, most people were unaware of the fundamentals or technical details. Many people sought the stock market as a means to diversify their earnings.

In 1911, the growing disturbance caused the launch of the state-wide Blue Skies Act in Kentucky to prevent unscrupulous companies from misleading investors. However, companies found a way around it and used mail.

Additionally, banks were using depositors’ money to trade in the stock market. There was crazy gambling on the stock market, with the apparent value of shares increasing. When the capital reached a high, the banks sold the stocks to the public.

It finally caused the Black Tuesday, the first major catastrophe in the US stock market. Everything changed after the great depression of October 29, 1929.

The stock market crashed, and many people lost their money. It completely shattered the trust of investors in the stock market. However, it helped form regulators and stringent laws for the stock market’s future.

The Need for A Market Regulator

The Black Tuesday was a tight slap to the face of the US stock market. There was no way people would invest money on securities that had no guarantee and returns.

To recover the investors’ faith and trust in the stock market, the US Government passed the Securities Act of 1933 and the Security Exchange Act of 1934. These acts were a precursor to launching a full-fledged Securities Exchange Commission (SEC) In 1933.

Soon after that, the Financial Industry Regulatory Authority (FINRA) was created as an independent authority. It oversees every broker and trade and is also authorized to levy penalties on brokers and securities.

In addition to FINRA and SEC, there are many other smaller self-regulated organizations. However, they must first register with the SEC.

Other Malpractices That Have Taken Place Over the Years

Accountancy Fraud

It is common knowledge that companies must disclose accurate financial statements. However, many accounting firms inflated the true worth of their clients. It is a shameful memory in trading history.

SEC imposed penalties on all leading accounting firms involved in the ordeal.

Mutual Fund Fraud

In trading, timing is everything. Many brokers and mutual funds delayed payment and buying stocks. It made many consumers lose a lot of money.

The SEC accused and penalized Bank of America for keeping it a secret from investors.

Five Rules That Have Shaped the Stock Market

Many rules have had a profound impact on the evolution of the stock market. Some of them are as follows:

The Securities Act and the Securities Exchange Act

The Securities Act of 1933 was the successor of the Blue Skies Act, and instead of operating in just one state, it encompasses almost the entire US. According to this act, companies must provide specific and precise information about the securities.

The Securities Exchange Act of 1934 later extended the act to encompass all securities in the stock market or over the counter markets.

Investor Advisor Act

The Investor Advisor Act of 1940 made it compulsory for all investors and brokers to register with the SEC. They were also mandated to follow all the standards under the SEC.

Trust Indenture Act

The Trust Indenture Act of 1939 prohibits debt on any public offering. It permits the sale of bonds over $5 million only after an indenture signed by both the buyer and the seller. Furthermore, the SEC appoints a trustee to oversee the deal and make sure the bondholder is not fleeced of the money.

Sarbanes Oxley Act

The Sarbanes-Oxley Act came into existence in 2002, after the Accountancy Fraud. It imposed strict rules and penalties on auditors, corporate officers, and accountants for violation of securities rules. It also set a more stringent record financial keeping system for their clients.

Dodd-Frank Wall Street Reform and Consumer Protection Act

The 2008 financial crash was caused due to many financial institutions and mortgage lenders hedge funding and securities trading. The Dodd-Frank Wall Street Reform and Consumer Protection Act imposed many regulations on these institutions.

The Current State of Stock Markets and Investors

A lot has changed since the early days of securities investment. Today, stock market investing has become a household phenomenon, and the trust in the US stock market is high.

In the modern world, there is increased transparency with digital trading. And many investors are now using algorithmic stock trading to stay one step ahead of regular investors.


The US stock market has seen many ups and downs before reaching its current trust and stability. The frauds caused the US to closely analyze the stock market and impose laws to curb malpractices. Thanks to these laws, the US stock market has evolved with fair trading for everyone.

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