Stocks – How It All Started

In today’s financial markets, billions of shares are traded every day. The biggest exchanges by volume are New York, Tokyo and London, but through electronic trading, shares are bought and sold around the world around the clock.

Chinese philosopher LaoTse didn’t know about stock trading, he lived in the 5th century BC. But he did know ‘that even the longest journey begins with a first step’.

In the case of stock trading, this first step was made in Amsterdam in March 1602. To finance a company and diverse the risks of the business, was the main reason to issue the first stock in the world.

Issuer was the Dutch East India Company, who’s purpose was to ship rare goods from Asia back to Europe, namely spice from India and Indonesia; silk, tea and porcelain from China or copper and gems from Siam (Thailand).

The business looked pretty profitable, since the Dutch East India Company was granted a monopoly on these shipping routes and the imported merchandise would be sold for a good price in Europe. But first they had to finance the fleet and then was this risk, that a ship full of precious goods, wouldn’t make the long trip back home, either by sinking in harsh weather conditions at sea or by loosing the freight to piracy.

Nonetheless, investors bought the stock and granted the financing, so that in 1604 the first ship left Amsterdam towards Asia.

The risks for investors of loosing the money was compensated by offering a natural dividend in form of these rare goods, often valued higher than gold at that time. The business went on quite good and the shareholders, mainly merchants from Amsterdam, made a solid profit.

The promising start wouldn’t last. Greed, corruption and the lack of attention to customers, ultimately led to the demise of the Dutch East India Company.

Historical lesson number one. If you buy a share, you are taking over a part of the business risk. Make sure you get compensated accordingly. Because in case of a bankruptcy, shareholders are last in line.

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Historical lesson number two comes also from Holland. How speculation caused the first stock market crash in the world, will be the next topic in our short historical ex-curs. http://www.theleader.ro/too-good-to-be-true/