If you've ever owned stock, then you've participated in the modern version of a joint stock company. While joint stock companies are no longer in use, the structure may sound familiar. Several investors own a joint stock company, each owning a share of the company based on their invested amount.
Joint stock companies most closely resemble modern-day corporations. Read on to understand a joint stock company's historical significance for modern investors.
How Does a Joint Stock Company Work?
Joint stock companies were formed to fund companies that required significant additional capital or were too expensive for an individual or government to fund. Like a modern-day share corporation, owners or shareholders in a joint-stock company are expected to share in its profits.
However, there are also significant differences between a joint stock company and a corporation. Most notably, shareholders of a joint stock company had unlimited liability for debts owed by the company. In contrast, shareholder liability in modern corporations is limited to the value of shares.
A joint stock company could also be compared to characteristics of a partnership in that ownership is split between shareholders who receive a share of the company's profits in proportion to their ownership stake. Again, this would be with unlimited liability in a joint stock company.
A famous example of a joint stock company was the East India Company, founded in England and operated from 1600 to 1874. The East India Company was arguably the most powerful corporation in history.
It dominated global trade between Europe, South Asia and the Far East; had its own army and navy used to fight wars; and conquered and colonized what is today India, Pakistan, Bangladesh and Burma. While its influence in these countries was generally destructive, there's no denying its power and influence in global trade.
Key Characteristics of a Joint Stock Company
Key characteristics of a joint stock company include:
- A company with multiple owners — shareholders
- Shareholders own a portion of the company proportionate to their shares
- Shares are transferable
- Shares can be traded on stock exchanges if the company is public
- Shareholders could lose personal property to pay off debts for the company
Types of Joint Stock Companies
There are different types of joint stock companies based on legal structure. These include:
Statutory Company
A statutory company is a government company established to provide public services that benefit the population. An act of a nation's legislature establishes a statutory company. The act then details the purpose, responsibilities and special privileges of the company.
Chartered Company
The royal family created a chartered company or incorporated under a nation's royal charter. Chartered companies may have privileges or special rights in conducting business.
Advantages of Joint Stock Companies
There are significant advantages to joint stock companies, especially in developing global exploration and building modern economies. Other benefits of joint stock companies include:
- Cash: Offers businesses access to large sums of capital to facilitate development
- Governance: Shareholders get a say in company governance, including the right to elect the board of directors.
- Liquidity: Shares are transferable. Investors can buy or sell them freely.
- Unlimited shares: Public joint stock companies have no limit on the number of shareholders, offering the possibility for additional funding.
- Transparency: Public joint stock companies use external auditing services and make their financial statements available, supporting good governance.
History of Joint Stock Companies
The earliest records of joint stock companies date back to the ancient Chinese Tang (618-907 A.D.) and Song (960-1279 A.D.) dynasties. Europe's first joint stock company was formed around 1350 in Toulouse, France. The Bazacle Milling Company issued 96 shares that were traded at variable values based on the profitability of the mills the society owned.
Since then, joint stock companies have played a crucial role in industrial and economic development, global trade and exploration. In addition to the East India Company (above), famous joint-stock companies included the Dutch East India Company and the Muscovy Company, which had a monopoly on trade between England and Russia.
U.S. companies are no longer organized as joint stock companies. Instead, businesses can choose legal structures incorporating many of the same advantages of joint stock companies, like a corporation, partnership or limited liability company (LLC).
However, joint stock companies are not extinct. Some emerging economies, including Poland, still have joint stock companies. Likewise, some of India's largest companies are joint stock companies, including Indian Oil Corporation Ltd., Tata Motors Ltd. and Reliance Industries Ltd.
Joint Stock Company vs. Public Company
The primary difference between joint stock companies and public companies is that modern public companies limit liability to shareholders, protecting shareholders' assets and preventing shareholders from holding obligations for company debt.
A joint stock company in the U.S. is no longer a specific legal business entity. Instead, the term could be broadly used to describe corporations, partnerships or even in some cases, LLCs.
The Role of Joint Stock Companies in Global Development
For much of the 17th to 19th centuries, joint stock companies fueled trade, global exploration and international connections between Europe and the rest of the world, contributing to economic development and stability.
Joint stock companies continue to play a similar role today. For investors who want to diversify into growing international markets, consider looking to India, the world's largest democracy and a growing economic superpower, where some of its largest corporations work as joint stock companies. You can also consider international mutual funds, ETFs or direct foreign investment as part of your diversified investment strategy.
Frequently Asked Questions
What are joint stock companies?
Joint stock companies are businesses where shareholders own a specified company share based on investment amount. In the simplest terms, joint stock companies are any company whose shareholders jointly own stock. Joint stock companies are used to raise additional funds and create companies with resources for significant development or exploration.
How did joint stock companies reduce risk in investing?
By allowing many investors and wealthy individuals to purchase stock, joint stock companies diversify risk to individual investors. Historically, joint stock companies had a track record of profitable trading ventures. For that reason, investors saw joint stock companies as low-risk, fast-return investments.
Why were joint stock companies created?
Joint stock companies were created to finance activities or endeavors too expensive for a private individual or even, in some cases, governments. Global trade exploration was a major driver of joint stock companies between the 17th and late 19th centuries.
About Alison Plaut
Alison Plaut is a personal finance and investing writer with a sustainable MBA, passionate about helping people learn more about sustainable investing and long-term wealth building for financial freedom. She has more than 17 years of writing experience, focused on investments, business, personal finance, and real estate. Her work has been published in The Motley Fool, MoneyLion, and regularly appears on Benzinga.