Chapter 1 - Introduction Flashcards
Difference between bonds and debentures (debt instruments)
Bonds are secured by a specific asset of the issuer. Debentures are secured by general credit of the issuer.
4 types of financial instruments
Debt (bonds, mortgages, debentures, treasury bills and commercial paper)
Equity (stocks or shares)
Mutual Funds
Derivatives
2 types of shares or stocks
Common shares and preferred shares.
What is the difference between common and preferred shares?
Common shareholders have a vote and a claim to profit when the business is profitable.
Preferred shares do not have a vote and they are generally entitled to a fixed dividend. They have a prior claim on the assets of the company before common shareholders.
What is a mutual fund
The fund raises capital by selling shares or units and this capital is them invested. The unit holders receive a portion of the money made by the fund.
What is a derivative security
A financial security, such as an option, or future, whose value is derived in part from the value and characteristics of another security, the underlying security ie an option
What is a call option
A derivative security that gives the holder the right to purchase the underlying interest.
What is a put option
A derivative security that gives the holder the right to sell the underlying security.
What are the 2 types of securities markets?
Primary and secondary.
What is a primary market?
The market where a security trades upon its primary distribution.
What is a secondary market?
The market where the trading of previously issued securities takes place.
In a secondary market trades take place between investors. Issuers receive no money
2 types of secondary markets
Dealer markets (over the counter markets) and auction markets (clients bid and offers are channeled to a central market)
In the capital markets What are intermediaries?
Organizations that assist in the transfer of capital from savers to users it brokers, banks.
In the securities sector of the capital market they are investment dealers
What is an underwriting?
Underwriting generally involves the purchase from the government or company of stocks or bonds. A dealer or group of dealers buys the issue and attempts to resell it to investors for a profit. The dealer earns a profit because of the effort in selling it. He also asses risk if the price falls.
2 functions of investment dealers?
- To help transfer capital from the savers to the users through underwriting and distributing securities on the primary market.
- To maintain a secondary market where previously issued or outstanding securities can be traded.
What is a stock exchange?
A not for profit organization owned and operated by member brokerage firms.
What is the difference between a dealer acting as a principal or as a broker or agent?
When acting as a principal the dealer owns the stock in his inventory and he profits by the difference in his purchase price and the sale price.
When acting as a broker the the dealer never owned the stock, he is brokering the deal between the seller and the purchaser. Profit is made by commission from the person for whom he acted.
What is a market maker?
In some exchanges certain traders are allowed to buy from their own firms accounts to enhance market liquidity. These people are called market makers.
Requirements to sell securities to the public (investment advisor)
Be of legal age
Pass the CSC
Pass the conduct and practices handbook exam
Be registered
What is the Canadian securities Institute
The industries educational body
What is the Canadian Investor Protection Fund
The body that insures clients from losses up to a set amount
What does NASDAQ stand got
National Association of Securities Dealers Automated Quotations
Name 2 broad categories of international bond issues.
Foreign Bonds and Euro Bonds
Describe Foreign bonds
Bonds offered and denominated in a currency of a country other than that of the borrower, with members of the underwriting community resident in the country where the issue is floated.
Ie a Canadian company where the issue is underwritten and sold in the USA
Describe a Eurobond
A Eurobond issue may be denominated in one of several currencies (US dollars, Canadian dollars, Swiss or French franks, Japanese Yen or Sterling).
It will be underwritten by a multinational dealer-banking syndicate,
It will be offered simultaneously in several European and other financial centers to financial institutions who will distribute it to their clients.
It is usually sold in a country other than where it is denominated.
Name 3 primary and 2 secondary goals of investors
Primary:
Safety of Principal
Income
Growth of Capital
Secondary:
Marketability or Liquidity
Tax minimization
What is the trade off for a highly safe investment.
Lower rate of income return and lower opportunity for capital growth.
What are the safe investments in Canada?
Federal, Provincial and municipal bonds held to maturity.
Selected high grade corporate bonds.
Shorter term bonds
Government of Canada treasury bills are the safest (virtually risk free).
What does an investor have to do to maximize income.
Usually give up some safety because he will have to purchase corporate bonds or preferred shares with lower investment ratings.
In general as yield goes down safety hoes up BUT it should not be assumed that as yield goes down safety goes up.
What is a stock that could be described as a growth of capital stock?
It is going to be characterized by low yield but it holds considerable promise for growth.
Typically a common stock in an expanding company in an innovative market.
