The stock market
The history of shares
The world’s first shares date back to Ancient Rome, though it was in northern Europe at the beginning of the 17th Century that joint ownership of companies first became popular. The world’s first joint stock company, the Dutch East India Company, was formed in 1602 by the merger of several small Dutch traders.
The Dutch East India Company was given the exclusive right by the Dutch government to import spices from the ‘spice islands’ – now part of Indonesia – but shipping was an expensive and high risk activity which required considerable investment.
Over 50% of all voyages ended in shipwreck, and the price of spices was very volatile, so in order to raise finance risks needed to be spread as widely as possible. Until 1602, each venture by Dutch and Portuguese traders was funded separately, and wound-up (liquidated) after each voyage, once the financiers received their profit. However, the formation of the Dutch East India Company as a long term trading venture meant that company shares had to be issued rather than just shares for each voyage*.
The world’s first stock exchange was also set up by the Dutch East India Company in 1602. This enabled the company to become the world’s largest and the first recognisable multinational company.
Any Dutch citizen could buy shares in this company, and crucially they could be traded. In 1606, the first paper share was issued, and the word shareholder came into common use.
The formation of joint stock companies, and the trading of shares, rapidly became popular across Europe. By 1698, shares were being traded in the coffee houses of London, the forerunner the London Stock Exchange.
SOURCE: LONDON STOCK EXCHANGE
Demand for shares
People demand shares for two main reasons:
- To earn an income from dividend payments when firms make a profit.
- For a speculative return, that is selling shares at a higher price than the shares were bought for.
Speculative demand is influenced by a number of factors including:
- The state of the economy
- Company news
- Analysts reports
- Share prices
- Press speculation
- General consumer ‘sentiment’ about the future
Demand for shares
An increase in the demand for shares will shift the demand curve to the right and lead to a rise in share prices.
The supply of shares
Shares are issued to raise finance for the issuing firm. Once issued, shares may be traded on the stock exchange in the expectation of making a gain, or avoiding a loss.
Supply of shares
An increase in the supply of shares will shift the supply curve to the right and lead to a fall in share prices.
The effect of a change in share prices
When share prices change the value of many savings and pension schemes will also change. This creates a wealth effect similar to changes in house prices. A fall in share prices will reduce the value of financial assets and create a negative wealth effect, and a rise in share prices will create a positive effect.
The largest holders of UK shares are insurance companies, pension funds, and private individuals.