Hi, The Investor’s Podcast Network Community!

August is in three days. Is there a word for having back-to-school flashback anxiety as an adult? Let me know if so.

📝 On a lighter note, today we’ll step into the classroom to explore some history: The origins of the first modern stock exchange.

All this, and more, in just 4 minutes to read.

— Shawn

QUOTE OF THE DAY

“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.”

— William Feather

WHAT ELSE WE’RE INTO

📺 WATCH: How to get people to say yes — the science of persuasion

🎧 LISTEN: From poverty to power with Arnold Van Den Berg

📖 READ: How to build wealth, fast

THE FIRST STOCK MARKET

Financial innovation

Although the New York Stock Exchange is the most famous, it wasn’t the first stock exchange. That title belongs to the Amsterdam Stock Exchange.

Founded in 1602, it was created alongside the Dutch East India Company, which needed a better way to raise capital to fund its global trade endeavors.

The company underwent the world’s first initial public offering (IPO), inviting every Dutchmen to invest.

Pre-companies

From weather to poor navigation and pirates, voyages to the East Indies and Asia were fraught with peril.

To minimize these risks, ship owners often sought investors to fund voyages in return for a share of the proceeds. But these early limited liability company structures (‘pre-companies’) usually lasted for only one trip and were dissolved before the next venture.

As a result, investors would invest in multiple ventures simultaneously, hoping to hedge against the odds of them all ending in disaster.

A new approach

The East India companies, chartered as rival trading companies by the Dutch, British, and French governments, changed the paradigm. They issued permanent stock, paying dividends from the profits of all voyages undertaken, not just on a voyage-by-voyage basis.

These shares could be issued at a greater premium, allowing bigger fleets to be built. Larger operations with more stable financing, combined with royal charters blocking competition, meant considerable returns for investors.

The Dutch East India Company was created with a 20-year monopoly on trade in the East Indies granted by the States General of the United Netherlands, lasting until 1800, when the company was formally dissolved.

Imperial monopolies

Like companies today, the firm funded itself with a mix of debt and equity.

It would issue bonds or more shares of stock when money was needed for new voyages, and after it set up headquarters in Asia, the Dutch East India Company became the first multinational corporation.

Between 1679 and 1772 (almost one hundred years!), the company paid a regular dividend yielding between 12% and 40% — a pretty incredible annual payout by today’s standards.

Evidently, imperial monopolies were a good business.

Shareholders’ standards were much different, though. No financial reports were ever published, despite its shares trading publicly, since the company argued that shareholders would mostly be incapable of comprehending the numbers anyways.

Trading stocks

When the company’s shares were first offered to investors, it was proposed that after ten years, a “general balance” would be drawn up to disclose how the company was doing and provide shareholders an option to claw their money back.

Many, especially during an era where long-term investing was a much less familiar concept, felt uneasy about waiting that long.

In the company’s official offering, they addressed this concern by permitting shareholders to transfer ownership, aka sell stock to others, thus facilitating the creation of the first stock exchange for Dutch East India Company shareholders.

To close deals, Dutch traders would make a series of offers and counter-offers, accompanied by a blow to the other trader’s hand (here’s a video excerpt depicting it).

After the IPO closed, more than 1,100 investors participated. And just a few years later, more financial history was made when Isaac le Maire, an aggrieved co-founder of the company, colluded with a group of nine other men to sell short (bet against) the stock in the first recorded incident of short-selling.

The Amsterdam Stock Exchange continues operating to this day, more than four hundred years later, still trading more than 20 prominent Dutch companies, including Heineken and Shell (formerly Royal Dutch Shell).

Dive deeper

Check out this book, The World’s First Stock Exchange, to learn more.