the (hi)story of stocks and exchanges

VOC — Vereenigde Oostindische Compagnie

Couldn't get what it is? It means “United East India Company”. It was (and is) famously known as “Dutch East India Company”, because that is how it was referred to by the British.

VOC — Flag & Logo

so how it all started?

Back then in the 15th century, naval explorations set out by the Europeans had the same excitement and thrill as we have now for space explorations. By the end of 16th century, trade routes were well established and trading with the East started to become a vital part of the European economy.

The Europeans set out expeditions to plunder the wealth in India and other parts of Asia. Though the booty seemed to be lucrative, the risk involved was so high, especially of the voyage, let alone the negotiations and wars, which no single merchant could bear that all alone.

In those times, each ship was owned by a merchant and the fortune that was carried back to the homeland belonged to him. However, the voyage through the sea was not always successful and if the ship was wrecked or attacked by the pirates, there was no way of claiming any indemnity (or insurance) for it.

So, they came up with the idea of sharing the ownership. Instead of owning a single ship, owning one tenth share of ten ships proved to be less risky (this in the modern days is known as ‘Diversification’) and the fortune carried in the vessels was divided amongst the owners.

Later, it became customary to setup a joint-stock company for the duration of a single voyage which was then dissolved when the fleet returned.

This practice lost its sheen soon after the establishment of VOC as a chartered company in 1602. The Dutch government, not just recognized, but also sponsored and empowered VOC with quasi governmental powers to build forts, maintain armies, wage war, imprison and execute convicts, negotiate treaties with Asian rulers, strike its own coins, establish colonies. Moreover, it was granted a 21-year monopoly on Dutch spice trade.

VOC coins

The startup capital of 6,424,588 guilders was raised (Initial Public Offering — primary markets) for VOC through six chambers located in the port cities of Netherlands — Amsterdam (3,679,915), Middelburg (1,300,405), Enkhuizen (540,000), Delft (469,400), Hoorn (266,868), and Rotterdam (173,000).

Share Certificate (Enkhuzien Chamber) — Ownership and Dividend details

VOC was a joint-stock company which had shareholders of two types — the participanten (participants, the non-managing members) and bewindhebbers (governors, the managing directors).

It differed from the other companies of those times in the fact that, it was the first limited liability company, i.e. the bewindhebbers was limited only to the paid-in capital (which such limitation was usually given only to the participanten). The bewindhebbers typically had unlimited liability in any joint-stock company.

The main variation is that the subscription terms stated that there was no obligation for the company to pay the full amount for the shares. So the money invested is locked-in for the lifetime of the company (here, 21 years, as chartered by the government. And 21 years is too long for any investor. Anyhow, after the 21 years, the company was dissolved and re-established but this time for an indefinite period of time).

Therefore the investors had to liquidate their shares only by means of trading amongst themselves (secondary markets). This turned out to be a game changer leading to the formation of Amsterdam Stock Exchange (now, EuroNext), the first established Stock Exchange.

Amsterdam Stock Exchange

Amsterdam Stock Exchange, built by Hendrik de Keyser c. 1612

The Amsterdam Bourse was established as a commodity exchange in 1530 and VOC shares started trading in the same premises from the year of establishment of VOC. The institution of open-air market shifted to quite a few places and later built its own Exchange Building in 1611. The building had sections which separated trading of VOC securities and commodities.

The shares were traded by outcry system in the stock exchange. The trust on the authenticity of the shares being traded was upheld because of official bookkeeping by East India House (which acted more like Registrar and Transfer Agent of modern day). The Exchange Building was strategically located in Dam Square, where the proximity relative to the East India House, gave the investors the ease of registering the transaction in the official books of VOC within reach. It also eased out the completion of money transfer as exchange banks were situated nearby.

A bye-law on trade in the city restricted the trade that took place in the stock exchange to only weekdays from 11 a.m. to noon and this short window created more liquidity as more buyers and investors had to turn out at the same time. However, the bye-law doesn’t restrict any of the transactions that happen at other locations, which lead to the formation of trading clubs (which functioned more like modern day brokerage firms — outsider trading). As soon as the traders agreed upon the transaction, they could enter it in the official records of East India House (even during non-trade hours)

The Amsterdam Stock Exchange, therefore, proves to have followed the best practices of those times, envisaging the game plan in-and-out and ensuring the fraudulent activities in check.

It should definitely be remembered and revered for what it has given to the world — the Financial Markets.

Originally published at