The Evolution of Secondary Financial Markets, 1820–1920

Abstract

Among the features that characterize a reasonably well functioning financial system is the existence of an efficient market for previously issued securities. Financial instruments of various types represent a claim, a contract that gives the owner certain rights in the form of a return and/or repayment on the due date. The return, however, is dependent on future events and the level of risk varies depending on the conditions and the legal precedence rules for payments that apply to various financial instruments. The ability to raise loans by issuing new promissory notes or bills of exchange, as well as the possibility of mobilizing capital through the emission of bonds or corporate shares, is highly dependent on how difficult it is for the holder, when necessary, to sell the instrument, thereby changing his risk profile. An efficient handling of risk, and the proper functioning of the market for newly issued securities — the primary market — therefore, requires a well functioning market for existing financial instruments, a secondary financial market. This chapter deals with the emergence of such a market in Sweden.