How stocks and stock markets appeared  

At the beginning of the 17th century, a flood of overseas spices poured into Europe. Spices were so fond of wealthy Europeans that they were instantly swept away from the shelves. However, high demand pushed the import-oriented business to develop. So, having united in 1594, the Dutch merchants founded the Van Werre company, which made it possible to trade with the countries of the East without intermediaries.

Later, other similar trading companies were created.

In 1602, in an attempt to compete with Spanish and English importers, by decision of the authorities, the scattered trading companies were merged into a single Dutch East India Company (DEC) with a starting capital of about 6.5 million florins.

From 1580 to 1640, Spain and Portugal were a single state that dominated the trade in oriental spices. To take the palm from the spaniards, the Company needed to expand its presence in the countries with which it traded – build new ports in the eastern territories and build dozens of ships.

To raise funds and make participation in the DEC more attractive, it decided to issue the rights of the founders in the form of independent securities – shares or, instead, receipts confirming the contribution of funds. These papers not only fixed the shared responsibility for the fate of sailboats (and, accordingly, the right to take part in the distribution of profits) but also allowed them to transfer their shares to new owners or pledge them as security for obligations.

Investments were risky – statistics say that at that time, only one of three merchant ships returned home – the rest were attacked by pirates, died in wrecks or were intercepted by dishonest competitors. But those ships that managed to deliver goods to Europe brought hundreds of per cent of profit to their owners.

The opportunity to get easy money attracted the inhabitants of the Netherlands. Everyone, from merchants to servants, rushed to buy DEC shares. According to historian Neil Ferguson, there were 1,143 shareholders in Amsterdam alone. Curiously, about half of the investors invested small amounts – less than 1 thousand guilders. For comparison: at that time, a Dutch worker earned 300 guilders a year, and a carpenter – made 450. Using modern terms, the Company held a “nationwide IPO”.

Thanks to the involvement of the general population in the ranks of shareholders, the DEC was able to collect 6.45 million guilders, which allowed it to become one of the largest trading companies in the world. According to various estimates, its capitalization was 10-20 times higher than the market value of the British East India Company.

First ever dividends

The first years of business at the DEC  were not going well. The Company promised to begin paying out investors as soon as it made a profit of 5% of capital. It had planned that investors would receive the first money in 1603, but trade did not bring the expected income. To avoid panic, the DEC turned to the government with a request to hide the reporting from shareholders – and received the go-ahead.

So the first dividends were paid only in 1611 – not without pressure from investors. And since the Company had no money, the depositors received payments in spices. However, paying dividends on imported goods continued until the middle of the 17th century.

Those who wanted to receive money in exchange for their securities had only one way out – sale. So frustrated owners sold shares right on the streets of Amsterdam. By 1607, a third of the shares had new owners.

Trading in papers became commonplace, and in 1608 a separate building was erected for these purposes – the first stock exchange.

Changes to the register of DEC shareholders were made once a month, so a futures market arose – contracts for the supply of shares at a particular time. In addition, securities could be used as collateral and security for a bank loan.

Soon, the Company’s business went uphill, and by 1650, the total payments on the shares of the DEC were eight times higher than the initial contributions. Despite the blurry start, shareholders received 27% per annum on their securities over five decades, and in the first 120 years – 22.5%. Considering the share value growth, the dividend yield was slightly lower – about 5-7% per annum.

Best Trading Robots for Performance

Relevant news