In this blog we are going to discuss the origin concept of the stock market. How the stock market was created and how the concept of stock trading came into existence.
Assume there is a very small company X with an amazing business idea but no funds to execute it. So it approaches the government and pitches its idea. The government approves it and lends some money to the company. The company within a few years becomes very successful. Now it has decided to expand its operations. But for that it will again need money and so it approaches
the government again. But unfortunately this time the government refuses to lend money because of some economic problems. The company can take a loan from private players but will be possibly more expensive and limited.
So the company comes up with an amazing idea.
What if it asks the people of the country to contribute and raise money for the company according to each one’s capacity. In return, the company will make them owners and now they will become profitable when the company progresses.
This is exactly how the concept of the stock market originated in the early 17th Century. The company can ask the people of the country to lend money to it without any interest. In return the company will make them a part of it and provide money to them at regular intervals based on the profits(also called Dividends).
Assume the company X divided itself into 100 parts, kept 51 parts with itself(so that it holds the majority) and distributed the remaining in public.
Each part is technically called a share and every person with a share is called a shareholder.
Now let’s say after 5 years, the company grew 5 fold and someone had bought one share of the company, that person earned a 5 fold return along with the dividends the company is paying at regular intervals.
But what if someone has earned a lot of profits and wants to book it and exit his position. To execute this, he will need a buyer who agrees to enter into the transaction at current stock price. In order to facilitate this transaction, stock market provides a platform for trading to both parties. The concept of trading was introduced to facilitate this exchange of stocks.
In the next article, we will discuss how the buying and selling of shares impact share price.