History of Finance - Birth of the stock market

Some people today say that companies, and particularly multinational companies, rule the world. Many modern day projects exemplify the vaulting ambition of modern capitalism. If the 16th century had seen the revolution in money and credit and the 17th had witnessed the rise of the bond market, the next step was the rise of the "Joint Stock Limited Liability Company". But the ability of the company to transform our lives would depend on another innovation, the stock market.

In 1590, Amsterdam was the world’s capital of financial information. To finance the long and expensive wars against Spain, the Dutch introduced the first national lotteries. To protect their merchants from dodgy clientele, they also introduced the first central bank. But the one that left a lasting impression was the East India company. Started in 1602 in Amsterdam, the company began to gain control over the sea routes and establish trading posts. Dutch traders had already spread out all over the world, from Manhattan Island to Cape of Good Hope. But it was Asia that became the primary target of commercial Dutch expansion. The East Indies housed a variety of spices such as Pepper, Clove and Ginger which were extremely alluring to the Europeans. They craved for them not just to flavor their food, but also to preserve it. The pungent aroma became the smell of money to be made, enticing the Dutch to fetch them through Sea. The first fleets of the Dutch ships sailed on the 1st May 1598 and retuned 19th July 1599.

The spice trade was so profitable that one return trip was enough to pay for the cost of a building on an entire ship. In 1602, at the instigation of the Dutch government, these various companies came together to form the United Dutch East India chartered company. The company was to enjoy a monopoly over all trade, from the Cape of Good Hope all the way East to the Straits of Magellan (South America), accounting to approximately half the world. The structure of the new entity was novel, with the capital being divided unequally between all the major Dutch cities. The citizens were invited to participate in the new venture.

By 1606, anyone who put his money into the company would receive a piece of the action, a share of the profits of the company, giving rise to the worlds very first multinational company. Three years later, the board of directors of the East India Company declared that any shareholder who wanted their cash back could not have it refunded by also selling their shares to other investors. This invention changed the face of finance forever, because, it created a mechanism where the prices of shares were determined by the law of supply and demand. This paved the way for the rise of the stock market, with the first stock exchange based out of Amsterdam.

By 1610, the world’s first joint stock company was ready to conquer the planet having established a string of factories and warehouses across Asia and India. In 1620, it had established a monopoly of spice exports from Asia to Europe making its shareholders very wealthy. Over its entire lifetime the company paid an annual dividend of 16.5%, which were virtually all its profits that were being paid back to its shareholders. This new mechanism of finance has since been spreading out all over the world giving rise to the London Stock Exchange in 1698, New York Stock Exchange in 1792 and Bombay Stock Exchange in 1875.

While it arguably is the greatest invention in the history of finance, stock markets are highly vulnerable to fraud and deceit. History has shown time and over again how stock markets can also be shock markets overnight. The shady practices of cooking books and rigged stock prices have lived on till today, 400 years after the first shares were sold. Companies find it easier and simpler to manipulate earnings and to help raise more capital and lower borrowing costs. The price that people are ready to pay for a share of the company in the market tells you the money they think it is going to make in the future. The future however is always uncertain but we human beings are prone to over-optimism, so when prices of stocks surge upwards in synchrony it indicates that investors are gripped by a collective euphoria. However, as we have seen in the past, stock markets really can be like bubbles and we don’t know when it could burst.