Chapter 2 Flashcards
Investment Capital
Investment capital is the money people have saved for investing
Direct investing
Direct investing in real wealth through nonsymbolic activities such as buying a home
Indirect investing
Indirect investing in some symbolic or representational well such as mutual fund purchases, or buying stocks or bonds
The proceeds of government and corporate securities are invested in direct production. This is called “indirect” investment. This type of investment usually involves investment firms retail or institutional sales divisions
Characteristics of capital
Money – capital - is portable, responsive to the economic environment, and rare. It is, therefore, very selective in terms of where it goes
Centralized capital
Capital will be centralized where:
- There is a stable political environment
- The economy a strong
- Government fiscal policies encourage investing
- Government monetary policies ensure stability of the home currency
- returns will be favourable to the investor
- The labour force is skilled and productive
***Capital moves to where these conditions are best met
The suppliers and users of capital
Savings are the only source of capital: it comes from individual, institutional, and foreign investments who are the major sources of investment money
Corporations are not major sources of money for other participants in the capital markets because they tend to reinvest any excess funds in their business
Individuals and governments can be either savers or dis-savers
Non-residents are also a source of capital
Users of capital
- Canadian and foreign person’s, businesses, and governments all need to use capital
- individuals finance housing, cars, appliances etc. using various kinds of loans or credit
- foreign users of capital borrow from Canadian banks or sell their securities in the Canadian market. Canadian capital May be attractive to foreign users if it is cheaper to buy than their home currencies. This provides diversification for Canadian investors
- businesses use the capital to finance, expand, and I versified their activities and maintain and replace plants and equipment. Some of this capital comes from profits generated by the business, Somers borrowed mainly from banks, and the rest is raised in the securities markets by issuing money market paper (short term), debt (medium and long term), and shares (preferred and common).
- Federal, provincial, and municipal governments issue securities in public markets. The federal and provincial governments borrow to meet expenditures and finance large capital projects
- The federal government issues treasury bills (t-bills), marketable bonds, Canada Savings Bonds (CSB’s), and Canadian Premium Bonds (CPB’s).
- provinces may sell bonds to the federal budget or borrow from the Canadian or quebec pension plan (CPP/QPP)
- municipalities issue installment or cereal debentures to amortize the cost of providing streets, sewers, waterworks, police and fire protection, welfare, transportation, electricity etc.
Different types of financial instruments
Capital is distributed and becomes economically effective be a securities
Securities include mutual funds, stocks, and buns
Securities also take many other forms; they are the backbone of the financial instruments that I traded in the financial markets
The four categories of financial instruments are:
Debt instruments
equity instruments
investment funds
derivatives and others
Debt instruments
Also called fixed income securities
A debt instrument is one in which there is a lender and borrower and alone is made from one to the other
The borrower is called the issuer
The issue or make regular payments to the lender over the agreed-upon term of the loan and on the maturity date of the loan repay is the full loan amount to the lender
Debt instruments include bonds, debentures, mortgages, treasury bills and commercial paper
Equity instruments
And equity instrument is one that is based on stocks
There are two types of stocks preferred and common. Stocks do not have a maturity date
Dividends are paid on common stocks, depending on the profitability of the company and whether the directors vote to pay dividends to shareholders
Stocks were purchased with the hope of receiving dividends and with the expectation of being able to sell the stocks for a capital gain
Holders of common stock have the right to elect directors of the company annual meeting
Preferred Shares
The directors also vote whether to pay dividends on preferred shares however the radon preferred shares dividends is fixed when the shares are originally issued and must be paid before dividends on common shares may be paid
Because preferred shareholders have a preferred claim on dividends and assets before common shareholders, and investment in preferred shares is considered less risky than an investment in common shares
Preferred shareholders do not have the right to vote at annual meetings, I might come and shareholders. However, voting rights maybe granted if dividend payments are not made. Dividends are not paid for shareholders are in arrearsand must be paid before any dividends maybe paid to common shareholders
Investment funds
These are mutual funds
Derivatives and other financial instruments
Derivatives are products that derive their value from an underlying asset, such as a stock
Both options and futures are derivatives
Financial markets in Canada
Financial markets are where the financial instruments or traded
A security is for sold on the primary market which is when a company first offer is it shared in the stock market it uses IPO or initial public offering him
After concluding sales we are the primary market shares are traded on the secondary market
Stock exchange
A stock exchange is the place were securities are treated
There are five Canadian exchanges the Toronto Stock exchange: For established companies
the TS X venture exchange: for new companies
the Montreal exchange: for financial and equity derivatives
The Canadian national stock exchange: as an alternative to the TSX venture exchange
I CE futures Canada: for agricultural derivatives
Market capitalization is the value of a company listed on the stock exchange as measured by the market price of issued and outstanding common shares
The four financial markets are
The money market
the long-term capital market
the derivatives market
the foreign exchange market
Money market
The money market is we’re short time securities like treasury bills are issued and traded
Securities have a maturity date of one year or less, except government of Canada bonds that have less than three years to maturity
Money market securities are called liquid because they can easily be sold without a discounted price and they have a low default risk
Long-term capital market
This market is reserved for stocks and bonds
The TSX, TSX venture exchange and the CDNX represent it
The over-the-counter market functions within long-term capital market which investment dealers transact with each other
Bonds trade OTC or over-the-counter
Derivatives market
Trading of the derivatives occurs on the Montreal exchange and the ICE futures Canada
Foreign exchange market
Foreign currencies are traded on this market:
- the spot market season mediate delivery - forward sees delivery in the future
Buying and selling foreign currencies hedges against a change in the value of the Canadian dollar
Mutual fund managers use the foreign currency market one part of their portfolios is held insecurities that are dominated in a foreign currency
Different financial intermediaries
Financial intermediaries such as banks transfer capital between those two have it and those who need or want it
These intermediaries are either deposit taking or non-deposit taking institutions
Banks are deposit takers insurance companies are not
The role of investment dealers
Investment dealers such a stock brokerages also do not take deposits but our conduit between investors and the markets
They underwrite and distribute new securities in the primary market
They facilitate trading in the secondary market
Other intermediaries
Chartered banks includes domestic banks foreign banks subsidiaries and foreign bank branches
Life insurers, Receive premiums from customers for life and property casualty policies
Credit unions: provide similar customer service is it banks but concentrate their customer base in the neighbourhood among an ethnic group or among others with similar interests
Investment funds: as discussed these are mutual funds
Canadian regulatory framework
At present there is no national regulator of securities; regulation is each province his responsibility. Collectively, the provincial regulators work together and coordinate the regulation of the capital markets to the Canadian securities administrators or CSA
Self regulatory organization’s or SRO’s
These industry watchdogs ensure compliance with provincial legislation in addition to developing rules and requirements specific to their members
SRO’s include:
- The investment industry regulatory organization of Canada or IIROC
- The Montreal exchange
- The Toronto Stock exchange
- TSX venture exchange
- I CE futures
- Mutual fund dealers Association or MFDA
Mutual fund dealers Association or MFDA
The M FDA regulates the distribution of Mutual funds via dealers
Dealers are provincially licensed. If they are a member of another SRO such as IIROC their activities are governed by that SRO
