The Amsterdam Stock Exchange: Centerpiece of Market Economics

In the year 1602 a new form of business organization was introduced that would change the course of economic history. The Dutch East India Company – known in its native Holland as Verenigde Oostindische Compagnie – became the first company to offer shares of ownership to the general public, thus allowing any person who became a stockholder to participate in its profits. The availability of this historic opportunity generated so much demand by would-be investors that the fixed number of subscribed shares began to rise in value and stockholders soon began receiving offers far in excess of their original investment. This burgeoning market for shares in the East India Company quickly led to a marketplace on a street in central Amsterdam where stockholders and potential investors engaged in exchange. Trading was so vibrant, and interest among those seeking to own a piece of the company became so robust, that a more substantial structure was soon desired to conduct share transactions. The city council of Amsterdam commissioned the construction of the world’s first stock exchange by the famous Dutch architect Hendrick de Keyser in 1607. Four years later, in 1611, the Amsterdam Stock Exchange officially opened for trading and with it a transformative new method of financing business ventures that would mark a significant development in advancing the evolution of market economics.

The Triumph of Equity Over Debt

The dominant means of financing business endeavors prior to the offering of shares in Dutch East India Company was through debt. Typically, these debts took the form of either direct bank loans or the issuance of bonds to provide proprietors and partnerships with the capital required to expand their business operations. This form of financing resulted in a lack of funding for ventures that were considered to be too high-risk by bankers and bond investors who were obsessed with capital preservation and a safe return on their investment. That meant relatively risky – and potentially high-reward – undertakings such as the spice trade in Asia were often turned down for the necessary capital to successfully launch and fund their enterprises. Additionally, the concentrated characteristics of proprietorships and partnerships put a tremendous debt burden on a small number of owners with little ability to diversify their risk. The formation of the Dutch East India Company created a decentralized structure for the company’s ownership and its associated risks. The company’s capital was derived from a marketplace of initial investors, constituted of owners from the general public, with the attraction of sharing in a potentially enormous amount of profit distributions in the form of dividends if the spice trade and the Asian voyages were successful.

Model for Modern Financial Exchanges

Before the stock exchange was built, the early trading days on the Damrak in central Amsterdam consisted only of a market for actual shares in Dutch East India. Eventually, the high-demand for these shares led investors and speculators to begin trading call and put options on the company’s stock, which essentially established the dawn of equity derivatives. Commodities and bonds were also traded after the exchange opened, although neither investment conveyed the potentially unlimited profit potential that equity shares in a fast-growing company commanded. Owning a portion of a dynamic enterprise became as acceptable as holding investments in commodities or debt instruments. Issuance of Dutch East India shares and the creation of Amsterdam Stock Exchange were the revolutionary events that advanced market economics in areas ranging from entrepreneurship, free trade, and the global financial system.

See Also:

• Investing in a Mutual Fund
• Invest in Structured Bonds?
• What are High Yield Bonds?
• Bank Runs Can’t Happen- Right?

Resources from Amazon:

• The Neatest Little Guide to Stock Market Investing: 2013 Edition
• A Beginner’s Guide to Investing: How to Grow Your Money the Smart and Easy Way
• The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)
• Investing For Dummies

This article was composed by TJ Barea, a freelancer with interests in finance, real estate and education; the world of finance can be a murky area, but the services of R&G Brenner can help make things a bit clearer.