Chapter 18 Flashcards
why is money important in the economy?
to promote economic growth and the creation of jobs
what is money?
anything that people accept as payment for goods and services
what is bartering?
barter is the direct trading of goods and services for other goods and services
what are the 5 characteristics of a good money system?
portability
divisibility
stability
durability
uniqueness
what is electronic money?
a newer form of money so you can make payments online using PayPal, google wallet or your banks website
what is digital currency?
electronic money not available as bills or coins
what are cryptocurrencies?
a type of digital currency created using computer algorithms
what are 5 disadvantages to digital currencies?
not legal tender in canada
hard to exchange for cash or goods and services
vulnerable to fraud and theft
transactions are not reversible
risky investments
what does the value of a dollar depend on?
a relatively strong economy
when the economy is weak the demand for dollars decline, how does this effect the value of the dollar?
it will lower the value of the dollar both in the global exchange and lower the amount of goods and services you can buy with it
when the economy is strong the demand for dollars is is high, how does this effect the economy and the value of the dollar?
it will raise the value of the dollar both in the global exchange and raise the amount of goods and services you can buy with it
what are the four ways the bank of canada promotes economic and financial welfare of Canada?
conducting monetary policy
promoting the safety and efficiency of Canadas financial system
providing efficient and effective funds management services
communicating our objectives openly and effectively
why does money supply need to be controlled?
to manage the price of goods and services (inflation) and to make sure employment levels stay stable
what three groups comprise the canadian financial system?
financial institutions
financial markets
clearing and settlement systems
why is Canadas financial system heavily regulated?
to ensure the integrity, safety and soundness of the financial institutions and protect investors, depositors and shareholders
what level of government regulates banks?
federal
what level of government regulates securities dealers, credit unions and caisses popularies?
provincial
how does the CIDC affect the canadian financial system?
they provide deposit insurance and stability to the canadian financial system
what level of government regulates insurance, trust, loan companies and co-operative credit associations?
can be federal or provincial, depending on which jurisdiction the company is registered or incorporated under
how much does the CIDC ensure up to?
deposits up to 100,000
is there a single body that regulates the canadian financial system?
no, it is regulated by multiple bodies
the responsibility of regulating the canadian financial system is shared by who?
the federal and provincial government
what does CIDC stand for?
canada deposit insurance corporation
originally the canadian financial system was a four pillar system, what were those four pillars?
banks
trust companies
insurance companies
securities dealers
what three service industries make up Canadas financial system?
traditional banks (commercial banks)
credit unions and trust companies
non banks
what is a commercial bank?
a profit seeking organization that receives deposits from individuals and businesses in the form of chequing and saving accounts
what are the two types of customers commercial banks have?
depositors and borrowers
how do commercial banks make a profit?
by efficiently using depositors funds as as inputs to invest in interest bearing loans to other customers
name nine of ten services commercial banks offer?
chequing account
saving accounts
credit card
loans
life insurance
brokerage services
financial counselling
registered retirement saving accounts
travellers cheques
safe deposit boxes
what are credit unions?
non-profit, member owned financial co-operatives
what are 5 services that credit unions offer?
interest bearing chequing accounts
short term loans at low rates
financial counselling
life insurance
home mortgage loans
what is a trust company?
a financial institutions that conducts activities like a bank
what are some services that a trust company offers that a bank cannot?
with its fiduciary role (trustee) a trust company can administer estates, pension plans and agency contracts
what is a non-bank?
a financial organization that accept no deposits but offer many services provided by a regular bank
what are some examples of non-banks?
pension funds
insurance companies
commercial finance companies
consumer finance companies
brokerage houses
what are pension funds?
amounts of money put aside by corporations, non-profit organizations or unions to cover part of the financial needs of their members when they retire
what is a electronic fund transfer (EFT) system?
messages about one transaction are sent from one computer to another
what is a debit card?
serves the same function as a cheque, it with draws funds from a chequing account
what is a smart card?
is an electronic transfer funds tool that combines a credit card, debit card, phone card and drivers licence
what are the five things the canadian financial market consist of?
money
bonds
equities
derivatives
foreign exchange
what is a security?
a negotiable financial instrument that represents some type of financial value (a transferable certificate of ownership of a stock or bond)
what is a securities dealer?
a firm that trades securities for its clients and offers investment services
what are 2 other terms for a securities dealer?
investment dealer
brokerage dealer
what is a securities market?
financial market places for stocks, bonds and other investments
what are the 2 major functions of securities markets?
provide businesses with long term funding to finance capital needs
platform for private investors to buy and sell securities to build their financial future
what is the primary market?
the market for the sale of new securities (IPOs)
what is the secondary market?
the market for the trading (reselling) of a stock previously sold on the primary market
what must a company before seeking public financing (looking to sell IPOs)?
a prospectus
what is a prospectus?
a condensed version of economic and financial information that a company must make available to investors
who needs to approve company issued prospectus?
the securities commission
what is the securities commission?
a government agency that administers provincial securities legislation
what does the securities commission do?
ensure securities companies are complying to the legislation and regulations
what is a stock exchange?
an organization whose members can buy and sell (exchange securities) securities for companies and investors
what is a stockbroker (investment advisor)?
a registered representative who works as a market intermediary to buy and sell securities for clients
what are online brokers?
an online trading service to buy and sell stocks and bonds instead of using a traditional broker
what is a robot-advisor?
automated online tools that use advanced algorithms to make investment suggestions
what are the five key criteria when selecting investment options?
investment risk
yield (expected rate of return)
duration (length of time your money is committed to that investment)
liquidity ( how quickly you can get your funds back if you need them)
tax consequences
what is a bull market?
when the stock prices are rising in the market
what is a bull investor?
an investor that buys stock in the anticipation that it is going to increase in price
what is a bear market?
what the stock prices are declining
what is a bear investor?
someone who sells stock in anticipation that it is going to decline in price
what does the market price and growth potential of most stocks heavily depend on?
the corporation meeting its business potential
what is capital gain?
the positive difference between the price at which you bought you bought a stock and what you sell it for
what can be a good way to estimate how a companies stock is going to do?
watch the businesses financial and growth projections
what opportunity does buying a stock provide for an investor?
an opportunity to participate in the success of emerging or expanding companies if the share price rises
what is a stock split?
when a high per-share stock splits their stocks so it does not impact value for previous shareholders but increases the demand for potential investors due to the lower price
what are stock indexes?
stock indexes measure the trend of different stock exchanges
what are some Canadian stock exchanges?
canadian stock exchange (CSX)
Toronto stock exchange (TSX)
what is buying a stock on margin?
buying stock on the margin is when you borrow some of the stocks purchase cost from the brokerage firm
what is the benefits of investing in government bonds?
low risk and guaranteed return
why do government bonds have a guaranteed return?
because they have the financial baking and full faith and credit of the government
what is a mutual fund?
a fund that buys a variety of securities and then sells units of ownership in the fund to the public
what is a mutual fund company?
similar to an investment fund company a mutual fund company pools investors money to buy stocks or bonds with
what are the 3 benefits to investing in a mutual fund?
diversification
more buying power
no load (they do the research you don’t have to)
what is diversification in investing?
buying several different investment alternatives to spread the risk of investing
what are different securities you can invest in?
stocks
bonds
ETFs
are mutual funds traded on the stock exchange?
no
what is an ETF?
they are collection of stocks, bonds, and other investments that are traded on securities exchanges
what is the difference between mutual funds and ETFs?
ETFs are traded on securities exchanges and mutual funds are not
what is a financial market infrastructure (FMI)?
a financial market infrastructure (FMI) is a system that facilitates the clearing, settling or recording of payments, securities, derivatives or other financial transactions among participating entities
what is another term for a financial market infrastructure (FMI)?
clearing and settlement system
how does a financial market infrastructure work?
at the end of the day if a commercial bank only had $300,00 worth of deposits but they had $500,000 worth of withdrawals they would have to borrow from other banks or the BoC and balance their deposits and withdrawals
what are the three types of FMIs?
payment systems
central counterparties (CCPs)
securities settlement systems
what does the payment systems FMI do?
facilitate the transfer of funds
what does the central counterparties (CCP) FMI do?
ensure that all obligations will be met on all contracts if someone fails to meet an obligation on their end of the contract
what does the securities settlement system FMI do?
facilitate the transfer of securities and other financial assets
