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A Brief Introduction To This Article
Whether you’re an investor, a financial planner, or simply someone interested in the history of finance and investing, understanding the differences between the US and UK financial markets is essential. From the Big Bang of 1986, to the 2008 Global Financial Crisis, the US and UK have had vastly different experiences in terms of the development of financial and investing history.
Through looking at the divergent paths taken by these two countries, we can gain insight into the strengths and weaknesses of both systems, and learn valuable lessons for the future. In this article, we’ll take a closer look at the unique financial and investing histories of the US and UK, explore the implications for investors and financial planners, and discuss what we can learn from the past.
Overview of US & UK Financial & Investing History
The two countries have vastly different financial and investing histories. The US developed a capital-market-focused model, whereas the UK developed a mainly intermediary-focused model. The US financial markets generally exhibited a shorter history but deeper institutionalization, while the UK exhibited a longer history but less institutionalization.
A brief overview of financial and investing history in the US and UK can help us understand where these differences originated. - In the US, financial history dates back to the formation of the New York Stock Exchange (NYSE) in the 1870s. The NYSE was a physical trading floor where investors would come together to trade securities.
Trading securities was mainly conducted via face-to-face interactions and broker networks. The US developed a capital-market-focused model, with a major focus on the development of a liquid equity market. - In the UK, financial history dates back to the formation of the London Stock Exchange in the 1780s.
The LSE was also a physical trading floor where investors would come together to trade securities. Trading securities was mainly conducted via face-to-face interactions and broker networks. The UK developed a mainly intermediary-focused model, with a major focus on the development of a liquid debt market. This led to a more developed corporate bond market, but a less developed equity market.
How the US & UK Diverge in Financial & Investing History
The US and UK diverged in the 1950s and 1960s, following the Second World War. While the post-war economy boomed in the US, the UK was struggling with its growing balance of payments deficit, which led to high inflation. In 1951, the UK borrowed $3.75 billion from the International Monetary Fund (IMF) and $1.5 billion from the World Bank.
In order to repay the loan and reduce the government’s deficit, the UK government decided to introduce significant cuts to public spending. In order to increase tax revenue, the UK government was forced to increase taxes on income and capital gains.
The increased capital gains tax rate led to a significant decline in the number of individuals trading securities via the stock market, causing liquidity to plummet. With liquidity in the stock market declining, individual investors were forced to utilize the services of investment banks for executing trades.
Investment banks could not afford to be tied up in executing trades for small investors, leading to a decline in the availability of research and advice to retail investors. In the US, the capital gains tax rate was significantly lower, allowing for the continued growth of the equity market.
The decline in the equity market in the UK and the growth of the equity market in the US created a divergence in financial and investing history. This divergence was only made worse by the fact that the UK was also tied to the exchange rate mechanism, which meant that the UK had to maintain high interest rates. This led to a decline in the growth of the UK bond market, while the US equity market continued to grow.
Implications for Investors & Financial Planners
The financial and investing history of the US and UK has important implications for investors and financial planners. First, the history of the US and UK demonstrates that the model of the financial system is not static. Rather, it is dynamic, and the system can evolve over time.
While there are certain aspects of financial and investing history that are fixed, there are many that are not. Investors and financial planners should be keenly aware of this, since it means that the path taken by the financial system can be changed. There are a number of areas where the financial system can be improved and optimized. - One way to improve the financial system is by increasing investor education.
The financial system exists to serve investors, but in order for it to be successful, investors must be properly informed about the benefits of financial products, the various risks associated with them, and the best ways to use them. - Another way to improve the financial system is by increasing the availability of advice.
Financial products like stocks and bonds are very useful, but they are not always appropriate for all investors. In many cases, investors would be better off with a different product. Some investors may not be aware of this, and may benefit greatly from professional advice.
Lessons For The Future
Investors and financial planners should remember that financial and investing history is not set in stone. There are a number of ways in which the financial system can be improved, and we can learn from the past to make sure that these changes are implemented. By learning from the past, we can help to ensure a brighter future for the financial system.