Week 1: The Capital Market Flashcards
What are the 3 components of the wealth transfer process?
- Financial Instruments (what is actually bought/sold)
- Financial markets (facilitate buying/selling)
- Financial intermediaries (people/companies involved in [1] and [2])
Examples of financial assets/investments and explain
- Stocks (ownership of company)
- Bonds (issued by gov. and corps., when they want to raise money. Buying bond > Gives issuer a loan > They pay back FV and interest)
- Treasury bills (short-term loan to gov., a popular investment because of high security (it is from the gov after all))
Debt vs. Equity - Roles and what is it?
Debt: Borrowing
Equity: Ownership for wealth increase. Own parts of company, can have voting privileges or may receive regular dividend payment.
What are investment funds?
A “collection of investments from one or more asset class” alongside other investments in order to benefit from advantages of working as a group - like reducing risks of investment.
What are derivatives?
Derivatives: is a “financial contract” set between two or more parties that derive their value from an underlying asset.
What is private equity?
Involves the selling of publicly traded common shares or some form of preferred stock or convertible security to private investors
What is the relationship between financial instruments and financial markets?
Financial instruments only work well if accompanied by efficient markets
What are attributes of an efficient market?
- Fast (can buy / sell stock with minimal delay);
- Cheap (low fees to buy / sell); and
- Liquid (many buyers and sellers)
What actions are done in a primary market? What is an example of a primary market?
In a primary market, shares or bonds are sold by issuers for the first time. Can be an IPO or subsequent equity offering.
Example:
TD Bank > Sell Shares > Investor A > $$ > TD Bank (repeat).
What actions are done in a secondary market? What is an example of a secondary market?
In a secondary market, investor A sells shares to another investor for money. Investor A is not the issuer.
Example: If I buy 100 shares of TD Bank on the TSX today, the funds go to the shareholder who sold me the shares (not TD Bank)
Who are financial intermediaries? What are their motives?
People/companies that improve market efficiency by facilitating the flow of capital from buyers or sellers. They work for their self-interest.
What did the financial crises expose?
Areas where companies were working for self interest.
What is Capital Gain
When you buy a financial asset, hold it, then sell it at a higher price. The difference is capital gain
Describe capital
Mobile, scarce, and sensitive
List what an efficient allocation of capital depends on
- Stable political environment
- Economic trends
> Fiscal policy: Gov. makes it easy to invest, people invest
> Monetary policy: Interest rates low with low stable inflation, easier to invest in economy - Investment opportunities
> More options for investors = more investors
-Labour force
> Good labour force, business can be efficient and work better
List sources of capital (for a business) and briefly describe
- Retail investors (everyone people in financial markets)
- Institutional investors (pension funds, mutual funds, companies that have capital and uses it to invest in the markets)
- Foreign investors (foreign retail, instutional, or gov. investors that invest in Canada0
What are auction markets?
Where transactions converge in one location. Also called stock exchanges.
How do auction markets/stock exchanges make money?
From:
- transaction fees for investors
- listing fees for companies
- fees for companies making changes
- sale of historic data
