Was It Easier to Make Money in the Stock Market Between 1950-2000 or Today? A Comparative Analysis

Over the past seven decades, the stock market has undergone significant changes, making it easier or more challenging to make money. This article compares the market landscape during the period between 1950 to 2000 with the current era, shedding light on the evolution of trading costs, stock pricing mechanisms, and the accessibility of investment opportunities.

Commissions and Their Impact

During the 1980s, the cost of trading stocks was prohibitive for most individuals. A trade required a commission of 139 dollars, which meant buying and selling a stock would cost 278 dollars, an amount that could easily eat up one's potential profit. As a novice investor in the 1980s, I initially faced the challenge of navigating these high costs, as even the "discount" brokers only charged 39 dollars per trade. This reduced the effective profit margin and made it almost unfeasible to consider low-priced stocks or a diversified portfolio with a starting capital of 50,000 dollars in 1970, which is now around 370,000 dollars.

Stock Trading Mechanics and Penalties

Before the 1980s, stocks did not trade in pennies; instead, they incorporated 25 cent and 50 cent movements. Additionally, a "round lot" of 100 shares was required, with a penalty of 50 cents per share if you did not meet this requirement. Practically, this often restricted investors from assembling a diversified portfolio for less than 50,000 dollars. In 1970, this amount is equivalent to 370,000 dollars today. In terms of receiving trade results, reliance on physical mail for a few days or weeks was common, and brokers were too busy to service anything other than their top 10 clients.

Mutual Funds and Expenses

Mutual funds were not much better during this period. When I worked in the industry 30 years ago, mutual funds charged a 5 percent front load, meaning only 95 dollars out of every 100 went into your account. Individuals were often required to invest 1000 to 2000 dollars in today's value to avoid extra account maintenance fees if the investment was less than 10,000 dollars. Mutual funds imposed an additional 2 to 3 percent fee annually, along with a 1 percent annual account maintenance fee. As a result, while the SP 500 averaged around 12 percent over several decades, most investors ended up with returns between 3 and 4 percent, after factoring in all these fees.

Current Accessibility and Convenience

Today, the stock market has become much more accessible with the advent of fee-free trading, penny-priced stocks, and limited penalties for non-round-lot trades. Online trading platforms have made it easy for anyone to execute trades from the comfort of their home, reducing the barrier to entry significantly. For instance, a strategy involving selling covered calls to generate income can now be executed within a few minutes each month, costing less than 100 dollars in commissions and fees alone.

In contrast to the 1990s, if a similar strategy was attempted then, finding the trade results could take days, and even with a typical discount of 39 dollars per trade, the overall expenses would be in the thousands. Additionally, such a strategy would likely result in a loss due to fees being more than the premiums earned from the calls.

During the period from the 1950s to the 2000s, making money in the stock market was primarily for individuals and businesses in the industry and a small number of very wealthy or very knowledgeable people. Now, almost anyone can invest regularly in a low-fee, no-load index fund and potentially make money in the market. With slightly more training and education, individuals can open a fee-free online brokerage account and put together a decent portfolio for a few thousand dollars.

Challenges for Specific Groups

A particular group struggling with these changes includes stock brokers. During the era of high commissions, brokers could call a few hundred wealthy individuals daily and generate a substantial income. However, in today's environment, the role of the broker has become less lucrative. For example, a large office near me that housed several hundred brokers had a phone room but closed around 2005 due to the reduced market demand.

Furthermore, it is also plausible that the companies that charged 150 dollars per trade and 5 percent upfront fees, along with 3 percent annual fees on mutual funds, have faced more difficulties generating profits. These firms, with the exception of Lehman Brothers, are largely still in operation, indicating a certain level of profitability despite the changes.

Overall, the stock market has become more accessible and less costly to the average individual over the past seven decades. While this has disrupted traditional roles such as that of the stock broker, it has opened up doors to wealth creation for a broader segment of the population. The future of the stock market hinges on continued innovation and regulatory reforms to ensure that investment remains both accessible and rewarding for all.