Accounting is the language of business and investing. Beneath this fact, there is the world of math by which stock averages are calculated, curves are drawn, and analyses and charts are compiled. Some types of investing, and the math that supports them, are at a level of complexity that's beyond what the average investor could do quickly in his or her head. As such, we depend on machines to do most of the work. Read on as we follow the rise of these computing machines and their impact on investing's history.

Egyptian Beads
There is no doubt that calculating, as in the tallying of numbers, has been around far longer than the archaeological evidence can prove. Bones, stones and anything else used to tally don't always stand out as much as clay pots and fertility idols when archaeologists are digging into the past. It is likely that the ancient Egyptians were using early forms of the abacus to calculate taxes around 3000 B.C. By the 1300s, shopkeepers and moneylenders from Japan to England were using the abacus to track sales and calculate interest. The abacus was made up of beads on parallel wires that represented units of one, 10, 100, 1,000, etc. This allowed people to add or subtract large numbers without losing their place. This means that for almost 5,000 years the abacus was the best humanity could do.

Computing Without Numbers
It is important to note that as late as 1150, business in Europe was taking place in Roman numerals rather than the numbers we know today. Europeans didn't enter the world of Arab numerals until the translation of ancient mathematic texts were widely read. The printing press spread this literature around, as well as rediscovered Greek texts on geometry. This spurred European intellectuals to try their hand at advancing the field of computation. (Keep reading about how the modern investing world formed in From The Printing Press To The Internet and The Birth Of Stock Exchanges.)

Napier's Bones
The Scotsman, John Napier, discovered logarithms in 1614. Perhaps the greatest leap forward in math, this innovation gave bookkeepers a badly needed tool: the ability to multiply and divide. This sped up the work of shopkeepers and bookkeepers, freeing them to conduct more business. Napier created the precursor to a slide rule that was called, "Napier's Bones". It could help a person multiply, divide and extract both squared and cubed roots. The combination of logarithms with the previous introduction of decimals and Arab numerals made it possible to calculate percentages instead of speaking purely in fractions. This changed the language of taxes and loan terms.

The Pascaline
Blaise Pascal, the French philosopher, invented a calculating machine in 1624. It was called the "Pascaline", and it was the first calculator that required almost no mathematical skill to operate. It was still being used in the 1900s, when the electronic calculator finally condemned it to museums in the 1960s. The Pascaline helped spur business onward by making arithmetic a mechanical process instead of a mental one. Specialized bookkeepers could hire less-experienced people to do mechanical calculations and handle more clients as a result.

The Analytical Engine
Sir Charles Babbage started down the road that led to computers in the early 1800s. He made a mechanical device that could carry out mathematical calculations and print out an answer. It had an input device, storage, a processor, a control unit and an output device, all of which became basic components of general purpose computers. In 1884, Herman Hollerith patented the encoding of data using punch cards and the corresponding reader, and started the Tabulating Machine Company, which would one day become IBM (NYSE:IBM).

During the WWI and WWII, the armies demanded more computing power to analyze and process the mountains of information coming in. Because the military-industrial complex controlled a large portion of the world's capital during the war, it got what it wanted. Electronic and digital computers emerged in rapid succession, starting with the Atanasoff-Berry Computer (ABC) and ending with Electrical Numerical Integrator and Calculator (ENIAC). ENIAC was designed to set firing schedules for weapons in various conditions. The creators of ENIAC formed a private company that was bought out by the Remington Rand Corporation (makers of typewriters, razors and guns) and renamed UNIVAC.

With the introduction of transistors in 1940s, the UNIVAC I became the first computer for sale. The first one went to the Census Bureau, which was still using one of Herman Hollerith's tabulating machines, and the second went to General Electric. UNIVAC I was the only computer until IBM came up with the IBM 650 in 1956. From there, the computer race began, and the machines steadily became smaller, faster and more affordable.

Software Meets the Market
Prior to the introduction of computers, Wall Street was depending on calculators and people to make an understandable picture of the market. There were indexes and analysts, but the things they could say about the figures they quoted were limited by human capacity and the time it took to run the figures. Computers and data processing ushered in several innovations at once: Electronic trading made low-cost brokerages and the Nasdaq possible, processing speeds meant more accurate data at a faster pace, and software made technical analysis available to all investors, quickly leading to program trading. (For more insight, read The Power Of Program Trades.)

Program trading, which depends on the algorithms discovered by Napier hundreds of years earlier, became a powerful force on Wall Street. Computers running software that blindly traded shares to take advantage of arbitrage and protect portfolios with layers of stop-loss orders became popular with all types of investors, from institutional to individual. Computers became automated investors - like the Pascaline, it took little skill to operate one. This freed up brokers and investors to appreciate the finer things in life.

Black Monday
In 1987, program trading bit the hands that fed it. A minor hiccup in the market started a domino effect in computers with stop-loss orders, which is now referred to as Black Monday. As more computers blindly sold, prices fell further and more stop-loss orders were triggered. The avalanche continued until the exchanges locked out the computers and then Chairman of the Federal Reserve, Alan Greenspan stepped in. Today there are circuit breakers that prevent program trading from doing a repeat performance. (Keep reading about the Fed in The Federal Reserve and A Farewell To Alan Greenspan.)

Conclusion: The Dangers of a Beautiful Thing
The small, powerful computers that drive business today started as beads strung on a wire by someone sitting in the shade of a pyramid. With the right program, you can come up with the same figures those Wall Street analysts ponder day in and day out. The computer is, however, still just a tool; as such, it is only useful for investors who don't leave it to rust.

Related Articles
  1. Fundamental Analysis

    3 Ways Drones Are Changing Amazon's Business (AMZN)

    Find out the ways Amazon's cutting-edge drone technology may be changing the way the e-commerce giant is thinking about its business.
  2. Markets

    8 Sectors That Drones Are Influencing in 2016

    Find out which sectors of the economy are expected to be heavily influenced by the growing commercial application of aerial drones in 2016.
  3. Investing Basics

    Free Cash Flow Yield: A Fundamental Indicator

    Free cash flow can measure a business’s performance as if you’re looking at its net income line.
  4. Technical Indicators

    Four Commonly Used Indicators In Trend Trading

    No single indicator can punch a ticket to market riches, but here are four that remain popular among trend traders.
  5. Stock Analysis

    Analyzing Microsoft's Return on Equity (ROE) (MSFT)

    Discover a detailed analysis of Microsoft's historical return on equity, and learn how its ROE stacks up to its competitors in the tech industry.
  6. Stock Analysis

    If You Had Purchased $100 of Apple in 2002 (AAPL)

    Learn about Apple's stock performance and how a $100 investment in Apple back in 2002 would have grown by thousands of dollars by 2016.
  7. Financial Advisor Technology

    Advisors: Skimp on Technology at Your Own Risk

    Technology is rapidly transforming the way that advisors do business. Here are the areas where smart advisors are investing to gain a competitive edge.
  8. Financial Advisor Technology

    Top Problems with Financial Data Aggregation

    A new front in personal finance technology—data aggregation—seeks to make our financial lives easier. But here's why it may be stalling.
  9. Active Trading Fundamentals

    4 Stocks With Bullish Head and Shoulders Patterns for 2016 (PG, ETR)

    Discover analyses of the top four stocks with bullish head and shoulders patterns forming in 2016, and learn the prices at which they should be considered.
  10. Investing

    3 Healthy Financial Habits for 2016

    ”Winning” investors don't just set it and forget it. They consistently take steps to adapt their investment plan in the face of changing markets.
RELATED FAQS
  1. What are the historical origins of business intelligence?

    Business intelligence is not a well-defined term and is often interpreted differently depending on source or context. This ... Read Full Answer >>
  2. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  3. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  4. What is the difference between positive and normative economics?

    Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic ... Read Full Answer >>
  5. Is Apple Pay safe and free?

    Apple Pay is a mobile payment system created by Apple to reduce the number of times shoppers and buyers have to pay for goods ... Read Full Answer >>
  6. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
Hot Definitions
  1. Short Selling

    Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is ...
  2. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  3. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  4. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  5. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  6. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center