MARKET DATA REVIEW : Stock markets: Old idea, yet new idea for us

Back in the sixteen to eighteen century, slave trade was not fully controlled by any state or government. It was a purely economic enterprise organised and financed by the stock markets, supporting the ideas of free markets, according to the laws of demand and supply.

Private slave trading companies sold shares in the Amsterdam, London and Paris stock exchanges to finance the salve trade enterprise. And middle class European looking for good investment returns bought these shares. Relying on this money, the companies bought ships, hired sailors and soldiers, purchased slaves in Africa and transported them to America.

They then sold the slaves to the plantation owners, using proceeds to purchase plantation products such as sugar, cocoa, coffee, tobacco, cotton and rums. They returned to Europe, sold sugar and cotton for good prices and sailed again to Africa to begin another round. As we can only imagine, the shareholders were very pleased with the arrangement, because history tells us that, throughout eighteen century the yield on slave trade investment was about 6 per cent a year.

So, during that time and age, humanitarian organisation became a business enterprise whose real aim was growth and profits financed by stock markets (and in some cases bank credits).

And this was not only related to Africa and its slave trade history — when in 1821 the Greeks rebelled against the Ottoman Empire, the uprising aroused great sympathy in liberal circles in Britain and other European cities. The London financier saw an opportunity on this as well — they proposed to the Greek Rebel leaders the issue of tradable Greek Rebellion Bonds on the London Stock Exchange. The Greeks would promise to repay the bonds, plus interest, if and when they won their independence.

Private investors bought bonds largely motivated by the argue to make a profit, even though there may be some who bought these bonds out of sympathy for the Greek cause. The value of Greek Rebellion Bonds rose and fell on the London Stock Exchange in tempo with military successes and failures on the battlefields. In a way this war turned out to be a financial commodity listed in the stock market — fought, partly in the interest of investors. One of the largest financial crisis of the eighteenth century was a result of the so-called Mississippi Bubble. In 1717 the Mississippi Company, chartered in France, set out to colonise the lower Mississippi valley, establishing the city of New Orleans in process. To finance its ambitious plans, the company, which was in good connections at the court of King Louis XV, sold shares to the public and listed on the Paris Stock Exchange. John Law, the company’s director, who was also a governor of the central bank of France spread tales of the significant riches and unlimited opportunities in the Americas.

French businessmen and members of the urban class fell of these promises and the Mississippi company share prices skyrocketed to almost 10 times within a month of its listing. This, almost euphoria swept almost all the street of Paris, people sold all their possessions and took loans in order to buy the Mississippi Company shares, believing they had discovered the easy way to riches.

A few days later, the panic began, some speculators realised that the share prices were totally unrealistic and unsustainable. Investors started selling these shares, as the supply of shares rose — mainly caused by everyone wanted to get out quickly — their prices declined, setting off an avalanche. In order to stabilise prices, the central bank of France — at the direction of its governor, John Law — bought up Mississippi Company shares, but could not help either, the price of Mississippi shares plummeted and then collapsed completely.

The Mississippi Bubble was one of the history’s most spectacular financial crashes. Why I am putting this history here? because it is the Mississippi Company that was financed by the selling of shares to the public and listed in the stock exchange that partly contributed to the fall of overseas French Empire into the British hands, when this company crashed and facilitated the crisis in the France’s financial crisis, the British could still access public money via issuance of shares and borrowing money easily by issuance of bonds and at low interest rates to finance some of their oversees business enterprises and its empire.

That’s how powerful joint-stock companies and stock markets have been and can be. Some of us probably have heard other seventeen century companies which were financed via joint-stock and listed on the stock markets. Companies such as London Company, Plymouth Company, the Massachusetts Company, the British East India Company or the famous Dutch joint-stock company Vereenigde Oostindische Compagne, or VOC for short that was chartered in 1602.

VOC raised money from selling shares to build ships, send them to Asia, and bring back Chinese, India and Indonesian goods. It also financed military actions taken by the company ships against competitors and pirates. Eventually VOC money financed the conquest of Indonesia by the Dutch.

So, the concept and idea of stock market and what it is capable of doing to people, companies, institutions, ideologies and values as well as economies is as big and old as some of these historical moments indicates. Admittedly, for us, as individuals, institutions and government have not given this idea the necessary focus and attention that it requires. Because of our lack to embrace this idea, most of our economic institutions and not as inclusive. There are many opportunities that are being lost because we have not been able to learn to unleash the power of collective ownership through shares that are then listed in the stock exchange for tradability and liquidity. As a result of these we have an economically weak exchange, without adequate supply of securities or investors who could otherwise leverage on the existence of the stock exchange in our midst. So, what are the opportunities and what is the role of the stock exchange in the society?

The stock exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public. Besides the borrowing capacity provided to an individual or firm by the banking system, in the form of credit, stock exchange is the other common form of capital raising used by companies and entrepreneurs. Thus, the stock exchange plays an important role in capital formation in the country.

When people draw their savings and invest in shares (through an Initial Public Offering - IPO or the issuance of new shares of an already listed company), it usually leads to rational allocation of resources, because funds, which could have been consumed, or kept idle are mobilized and redirected to help companies finance their organizations. This may promote business activity with benefits for several economic sectors, resulting in stronger economic growth and higher productivity levels of firms.

Facilitates companies growth

Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against price volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition. Apart from acquisition mode of growth, even in organic growth, companies use the Exchange to raise capital through IPOs and listing of the same.

Increases government funds for development projects

The government can undertake projects of national importance and social value by raising funds through sale of its securities on stock exchange. At various levels the government may decide to borrow money to finance infrastructure projects such as sewage and water treatment works or housing estates or building bridges, roads, health facilities, education facilities, etc by selling bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus lending money to the government.

Both casual and professional stock investors, as large as institutional investors or as small as an ordinary middle-class family, through dividends and stock price increases that may result in capital gains, share in the wealth of profitable businesses.

Stock exchange provides a place for saving to general public. Thus it creates the habit of saving and investment among the public. The funds placed at the disposal of companies are used for productive purposes. As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the stock exchange provides the opportunity for small investors to own shares of the same companies as large investors.

Corporate governance and safeguarding activities for investors

The stock exchange renders safeguarding activities for investors, which enable them to make a fair judgment of their securities. Directors of listed companies are required to disclose all material facts to their respective shareholders, thus innocent investors may be safeguard from the clever brokers.

By having a wide and varied scope of owners, companies generally tend to improve management standards and efficiency to satisfy the demands of these shareholders, and the rules for public companies imposed by the stock exchange and the capital markets regulator.

Consequently, public companies tend to have better management records than privately held companies.