chapter 1 Flashcards
The Capital Market
what is a vital function served by financial market
the transfer of wealth from those who have extra wealth to those who need capital
what’s the purpose of financial markets
to drive economic growth by transforming savings into investments
what are the 3 components of this wealth transfer process?
- financial instruments
2, financial markets - financial intermediaries
define (investment) capital
capital incorporates the savings of individuals, corporations, governments, and other entities - it’s scarce + valuable, it’s only economically significant when it’s properly utilized
how can capital be utilized?
- direct investment
- indirect investment
define direct investment
investments in real assets that generate wealth directly (lang, buildings, equipment, human capital)
define indirect investment
investments in financial assets (stocks, bonds) which allows issuers of these securities to invest funds directly in wealth generating assets
what are some characteristics of capital
capital = mobile, scarce + sensitive
efficient allocation promotes economic growth, while inefficient allocation can constrain economic growth - bc of this, capital is selective + tends to flow toward attractive economic environments
what variables make capital flow into and out of countries
- the political environment
- economic trends
- fiscal policy
- monetary policy
- investment opportunities + risk-return opportunities
- labour force characteristics
why is the availability of capital important to a nation?
capital it necessary to promote economic output, improve productivity, encourage innovations, and improve the competitive position of a nation in general
define retail in the context of investors
investors who invest for their own account
define institutional in the context of investors
organizations that buy + sell securities on behalf of the underlying entity –> set up to serve its plan members
who represents a significant source of investment capital in Canada?
individual investors
corporation tend to retain a large portion of their earning to finance operations + growth and are not important source of capital
why is foreign investment important in canada?
necessary to fund deficits + growth
benefits vs cons of foreign investment
pros: helps to expand our international trading relationship
cons: may take long-term cash flows out of the country
what are the 2 types of international bond issues?
- foreign bonds: which are offered + denominated in the currency of a country other than the borrower
- eurobonds: which may be denominated in 1 or several currencies and are sold in countries other than the currency in which they are denominated
who are the users of capital
individuals, businesses, government
why do individuals use capital
primarily for consumption purposes, with the funds usually being obtained through personal loans, mortgage loans, or charge accounts
why do businesses use capital?
use capital to finance day-to-day operations, to maintain _ upgrade plant = equipment, and to finance growth. funds are financied internally, remainder coming from bank loans + through the issue of securities (money market, bond, equity instruments)
why do government use capital?
borrow to finance their expenditures
how does the federal government finance debt?
- treasury bills
- marketable short + long-term bonds (debentures
- Canada Saving bonds + canada premium bond - only purchased by canadian residents
what’s the use of financial instruments
enable the transfer of capital from suppliers to users
what are the categories of financial instruments
- debt
- equity
- investment funds
- derivative products
- other investment products
- private equity
define debt
represents a legal obligation to repay borrowed funds at a specified maturity ate + provide interim interest payments as specified in the agreemtn
define equity
represents part-ownership of a company
common vs preferred shareholders
common - provide holders with voting privileges _ may receive dividends
preferred - receive a fixed dividend amount that must be paid before any dividends are paid to common shareholders
define investment funds
a company that manages investments for its client - most common is the open-end fund (mutual fund)
define derivative products
derivatives derive their value from the price of another underlying assets - suitable for hedging or speculative purposes
define other investment products
income trusts + exchanged-traded funds = recent innovations that have become very popular investments
define private equity
financing can be equity or debt or a combination from a private side
higher risk ==> higher return for providers
lower liquidity than typical investments
types of private equity
- leveraged buyouts
- growth capital
- early stage venture capital
- late stage VC
- distressed debt
who are the typical providers of private equity
pension plans, endowments, foundations, wealthy individuals/families
what are the pros of an efficient market
fast + low-cost transactions
maintain a high degree of liquidity
define primary markets
sale of securities by the issue to the market for the first time, _ money flows to the issuers - in the form of IPOs or season offerings
define secondary markets
involve the sale of previously issued securities - no funds go to the issuer - secondary markets facilitate the primary markets by making securities transferable
how do finanical intermediaries improve the efficiency of markets
facilitate the trading or movement of the financial instruments that transfer capital between suppliers + users
define auction markets
Market where all transactions converge to 1 location
who are exchanges governed?
by bodies that consist of at least 1 permanent exchange official plus members of the BOD who are selected from member firms + 2-6 highly qualified public governors appointed or elected from outside the brokerage community
how are exchanges financed?
by transaction fees, initial listing fees, sustaining listing fees, fees paid by companies with respect to capital structure changes + through the sale of historic + market information
define dealer markets or over the counter markets
comprise a network of dealer that trade directly with each other over the phone or through a computer network - they are negotiated netowrks which maintain bid + ask quotationes received from the dealers acting as market makers in given seucirities
define alternative trading systems
computerized systems that execute orders outside traditional exchange facilities by matching order from their own inventory or by matching buy and sell orders from outside parties - may permit buyers = sellers to contact each other directly to negotiate trades
these systems are privately owned, often by individual brokerage firms or groups of firms
most customers are institutional investors who are able to reduce their transaction costs
ideal for trading of securities on a global basis
where are most bonds + debentures sold through which market?
dealer market
what are the concerns over the Alternative trading system
trades are not available to the general public, threat of technological problems, issues from trading across country border
what are the 3 electronic trading system
CanDeal, CBID, CanPX
