Why did merchants form joint-stock companies and utilize cottage industries?
Social Studies · College · Tue Nov 03 2020
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- Merchants formed joint-stock companies and utilized cottage industries primarily to minimize their individual financial risks and to increase production efficiency.
- Joint-stock companies were essential for raising large amounts of capital for big projects that were beyond the financial capability of a single merchant or entrepreneur. By combining their resources, these individuals could finance larger ventures, such as overseas trade expeditions or the establishment of colonies.
- This pooling of capital allowed investors to purchase shares, or "stocks," in the company. Thus, the risk associated with the venture was spread among many shareholders, who would share proportionally in the profits or losses. If the enterprise was successful, the shareholders benefited from dividends and appreciation in the value of their shares. If it failed, no single investor faced financial ruin.
- The cottage industry, also known as the putting-out system, was another way to increase production efficiency. Under this system, merchants provided raw materials to rural laborers who worked from their homes (or cottages) to produce finished goods.
- The merchants would then collect the finished products and sell them on the market. This system was beneficial to the merchants because it reduced the need for large capital investments in factories and machinery – production could be scaled up or down as market demand dictated without significant overhead costs. For rural laborers, it provided employment opportunities and a means of earning a wage, often as a supplemental income to their agricultural pursuits.