Stock markets have been of pioneer importance when it comes to contributing to the national economy. The stock exchange is an essential institution for the capitalist system of economy, and it has been a life jacket for every corporate institution that need funds to run, scale or start a new venture.
But how this whole trading game started? Who suggested the concept of the stock exchange?
Are you ready for some adventure and time travel with me?
LET’S TRAVEL TO EUROPE
All this started with the merchants of Venice. If I put it into the simplest terms, money lenders of Europe started trading for each other’s debts. Moneylender X traded a debt with much higher interest with money lender Y for another loan. However, apart from loan trading, they also purchased debt issued by the government.
The debt issue is an obligation that cannot be turned down unless and until fulfilled, such as bonds or debentures.
In the 1300s, the money lenders started selling the debt issues to the new individual investors. This was the first time when Venetians started the trading of government securities. This was the point when people started to realize that how some goods and commodities can earn them profits. However, the idea of stocks and shares was not invented till then.
HOW IDEA OF THE SHARE MARKET CAME INTO EXISTENCE?
How about we go a little farther this time with our time travel? Let’s travel back to the 1400s.
Antwerp, or I would say Belgium, which is indeed a beautiful place to be. This is where people started stock trading first. Startups or established businesses of that time used to accumulate their funds to travel across the sea to other countries. For thousands of years, such transactions were either done by trading communities or individuals.
Those merchants gathered in a place for the purpose of trading or exchanging goods from the countries worldwide. As there were merchants from various countries, there was a need for specific money exchanges to ensure that every deal was fair and not vain.
Eventually, in 1400, Belgium became the center point of trading. The motive behind such trades was the anticipation that the price of goods purchased from investor X would rise after a certain period. In the end, the investor who purchased the goods would be on profit as he sold them at a higher price. With this, people started trading with anticipation and relied on future forecast.
WHO INVENTED THE WHOLE STOCK MARKET GAME?
In the 1600s, the British, the Dutch, and the French government issued a charter to every company with East India in their names. While the whole imperialism thing was on the apex, it seemed like everyone was interested in having a share of profit in Asia and East Indies except for the people actually residing there. However, things seemed to be utterly risky for the businessmen who took goods from the east as there were barbary pirates, the risk of bad weather, and poor navigation.
Such uncertainty and risk convinced the businessmen that they need someone or some people who can finance their voyages for them in exchange for their voyage proceeds.
P.S. Only if their voyage is successful and they return unharmed with all the supplies and goods.
These early limited liability companies generally lasted only for a single voyage. After a prosperous voyage, that previous limited liability company was dissolved, and a new one was created for a brand-new voyage. However, if the investors just invested in a single venture, the risk taken was really high. So, to widen the risk, they invested in various companies simultaneously so that they don’t need to worry about losing their money if a venture failed.
But there is a twist to this merely a happy story.
When the East India Company came into existence, they changed the whole scenario and showed how it should work. Now, these companies decided to issue stock that pays dividends to the investors on the entire proceeds for all the voyages rather than just one. This was beneficial because this enabled the companies to issue more shares and build larger fleets. This also kept investors happy because the company’s size which had the royal charter, didn’t have to stress about competition, and earned more profits than other companies without one.
This is how shares and stock came into existence and all the trading began!
LET’S MEET AGAIN
This was such an adventure with you as we travelled back into the time and got to know some great facts. When it comes to investing and finance, it is one of the most dynamic and practical fields. Stock markets are an excellent example.Although sometimes this market operates on emotions and mere advice or tweets, such a boom remains for temporary purposes. It is better to do the homework before we face the teacher, and with that note, I am signing off. I will be back with another story on finance really soon.
However, I would love to know your thoughts on this one!