Week 2: The Canadian Securities Industry Flashcards
Name types of Canadian Regulatory Structures (SROs)
- Ontario Securities Commission (OSC)
- BC Securities Commission (BCSC)
What are investment dealers?
A financial institution that buys and sells investment products for clients (eg. shares, bonds, mutual funds). They can also offer financial advice and services
Name examples of investment dealers [Big 6]
TD Bank, RBC, Scotiabank, BMO, CIBC, National Bank of Canada
What are the multiple departments within an investment dealer?
Underwriting, trading, investment banking, brokerage
What do brokers do?
They are a person or entity who arranges transactions between a buyer and seller.
Difference between full-service and discount brokers?
Full service brokers: Offers “high-touch” service and advice with high fees
Discount brokers: Offers limited services, such as stock and bond trade execution, but no advice. Has low fees.
What is leverage? Relationship to financial services industry? What are potential risks?
When one uses borrowed funds (debt) for funding assets in hopes that the income of the new asset or capital gain surpasses the cost of borrowing.
Financial services industry is highly leveraged.
Potential risks include: Short term rates driven by short-term inflation freaks banks out
Explain “borrow short and lend long” in regards to leveraging?
Short-term borrowing finances long-term investments.
Ex. Borrow money every 90 days to finance a 20-year mortgage
How has technological changes impacted the financial industry?
- Increased interconnectedness of markets
- Interlisted securities
What does interlisted securities mean (lol)
Interlisted: When a stock appears on multiple stock exchanges (NASDAQ and NYSE)
Securities: Different kinds of investments, like stocks, bonds, derivatives, etc.
Impact of globalization on financial markets? Canada’s advantages?
- Markets are no longer restricted to local suppliers and issuers of capital
- Canadian investors can buy US listed shares and Canadian banks can lend to US borrowers
Regulatory Changes.- Technology
Technology increasingly allows for easy cash flows, via leverage on leverage, went crashing down in financial crisis
[PRIMARY MARKET]
What is it known as, and how do investment dealers make money?
Through selling NEWLY ISSUED securities to investors
[PRIMARY MARKET]
What are the two ways investment dealers can sell shares/equity, etc? Also, risks for each.
- As principals; where they…
- Act on their own principals; purchases shares w/ own money from issuer.
- Then sell shares to investors who want to have ownership of company, and gets money in return for selling
- Higher risk due to potential of share value decreasing - As agents
- Don’t use own money. They market the shares /bonds to investors — doesn’t buy it themselves.
- Doesn’t take on risk of buying/holding shares
[SECONDARY MARKET]
How do investment dealers make money?
They buy and sell securities ON financial markets
What is the difference between Primary and Secondary Markets for investment dealers?
In a primary market, the shares have not been issued. In secondary, the shares have already been issued.
[SECONDARY MARKET]
What are the two ways investment dealers can make money?
- As principals
- Invest their own capital and earn a spread between purchase and sale prices (also known as proprietary or liability trading) - As agents
- Invest their clients’ capital and earn a commission on EXECUTED trades (aka brokerage)
- There is a chance they wont earn any of the trade is not executed.
What happens after a trade is executed?
> The trade is “settled:”
- Cash from buyer’s brokerage acc is transferred to brokerage acc of seller
- Share ownership is transferred from seller to buyer
> CDS (regulatory grp) clears the trade as the central repository keeping track of who owns each share of the company.
How do banks make money? What do they earn?
They make money by collecting moeny from depositors (chequing/savings acc) and lend money to borrowers (car loans, mortgages)
Banks earn the difference between the cost of borrowing (interest paid to depositors) and revenue from lending (interest paid by borrowers)
What are other bank-like institutions?
- Trust and Mortgage companies (similar to banks, can also act as trustees)
- Credit Unions and Caisses Populaires (Quebec); these are owned by customers/depositors. The profit is returned to owners, therefore not focused on profits.
- Life Insurance Companies
- P&C Insurance Companies
- Investment Funds
- Pension Plans
What do Property and Casualty (P&C) Insurance Companies cover?
P&C Insurers cover cars, hourses, and business assets. P&C Liabilities occur more frequently (as car accidents are more frequent)
What are examples of Investment Funds?
- Mutual funds, hedge funds, EFTs (Exchange Traded Funds)
- Closed ended funds (shares that are issued only once, no more available after sold unless a share owner decides to sell them)
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What are closed-ended funds
Has shares that are issued only once, no more available after sold unless a share owner decides to sell them. They are listned on an exchange.
What are open-ended funds?
Are mutual funds that can be bought and sold at any time. Investors can only purchase and redeem units from and with the investment fund.
What are mutual funds?
A collection of investments that pools money from many investors. Money is then used to buy a variety of assets, like stocks, bonds, etc.
