Chapter 1: The Capital Market Flashcards
what is the vital function of financial markets
to help facilitate transfer of capital (money) from those who have extra wealth to those who require capital
how do financial markets drive economic growth
by turning savings into investments
why would those who have extra wealth/capital transfer it to those who require it
because they expect to make a return on it
what are the 3 components of the wealth transfer process
- financial instruments
- financial markets
- financial intermediaries
what are financial instruments
- what is actually being bought/sold
- mechanisms wealth/capital is transferred
what are financial markets
a marketplace where the buying/selling of financial instruments are facilitated
what exactly is capital
it is savings of:
- individuals (you and me)
- corporations
- governments
what are financial intermediaries
People and companies that improve market efficiency by facilitating the flow of capital from buyers to sellers
what are some points to note about capital
- it is scarce and valuable
- only economically significant when properly used
what are the types of investment
- direct investment
- indirect investment
what is direct investment
assets that generate wealth directly (ex. land, real estate, equipment) - something physically tangible
what is indirect investment
financial assets such as stocks, bonds, and treasury bills
what are stocks/shares/equity
ownership of a company/asset
what are bonds/fixed income
debt of a company or government (liability for those who issue it)
what are treasury bills
debt of a government
how does indirect investments work
- companies and governments issue (sell) financial assets and receive funds
- they then take the funds and invest them directly
- investors are the ones who are buying the financial assets to generate a return (ex. expecting to make more than originally invested)
what are the characteristics of capital
- mobile
- scarce
- sensitive
what is the affect of efficient allocation of capital
efficient allocation promotes economic growth
what is the affect of inefficient allocation of capital
inefficient allocation constrains economic growth
Where does capital tend to flow
capital is selective & tends to flow towards attractive economic environments
when will those who have capital transfer/invest their wealth
- only if it is easy, cheap, and generates a good return
- if it isn’t investors won’t provide capital
- and people who need it (ex. the government) won’t receive it
what does capital flows depend on
- the political environment (whether it is a stable government or a banana republic)
- economic trends
- fiscal policy (government spending & taxation)
- monetary policy (government by central banks)
- investment opportunities
- labour force (highly educated/laws governing rights of labour force)
who finds the availability of capital important and what do they do
- availability of capital is important to any nation
- all countries try to promote economic output, improve productivity, encourage innovations, & improve competitive position
what are the sources of capital (who are those that provide capital)
- retail investors
- institutional investors
- foreign investors
who are retail investors
- individuals like you and me
- those that invest for their own personal account
- represent a significant source of investment capital in Canada