Chapter 2 - The Capital Market Flashcards
What is investment capital?
Capital is both real (land, buildings, material goods) and representational (stocks, bonds, money). They all have economic value that represent the invested savings of individuals, corporations, governments.
What are the three characteristics of capital?
Mobility, sensitivity to its environment and scarcity.
Capital likes countries or locations where favourable conditions exist ie. stable government, not heavily regulated economic activity, hospitable investment environment and profitable investment opportunities.
Can you explain the difference between direct and indirect investment? What are some examples of each?
Direct investment (purchasing real items)
- a couple invests savings in a home
- a government invests in a new highway
- a company pays start up costs for a new plant
Indirect Investment (purchasing representational items)
- an investor buys stocks or bonds
- a parent invests in an RESP
- a couple deposits savings at a bank
What are the sources of capital?
Individuals, non-financial domestic corporations, governments, foreign investors.
Who are the users of capital? How does each user use capital in the economy?
Individuals - need capital to finance large purchases like homes, cars, major appiances.
Businesses - require capital to finance day to day operations, renew and maintain plants and equipment and expand and diversify their activities. A lot generated internally, some borrowed and then also raise the remainder in securities markets
Governments - major issuers of securities in public markets. When revenues fail to meet expenditures, or when they undertake large capital projects, governments must borrow.
What are debt instruments?
Also called fixed-income securities. Issuer promises to repay the loan at maturity and in the meantime makes interest payments to the investor. ie. treasury bills, bonds
What are equities?
Equity securities (stocks, shares) represent some form of ownership stake in the company that issue them. If the value of a company increases, the owner of the stock in that company receives a capital gain upon selling it.
What role do the financial markets play in Canada?
It’s where buyers and sellers meet. A well organized financial market provides speedy transactions and low transaction costs, along with a high degree of liquidity and effective regulation.
Can you compare auction markets to dealer markets?
Auction market - securities are bought and sold by investors. Investment dealers execute the buy and sell orders on behalf of their clients. Buyers enter bids and sellers enter offers. Trade is executed when there is a match in the bid and ask prices.
Dealer market - Unlike an auction market, where the orders of individual buyers and sellers are entered in a centralized marketplace, a dealer market is a negotiated market where market makers post bid and ask quotations via electronic platforms and computer networks. Bonds and debentures are sold mostly on dealer markets.
What is the purpose of the primary market?
A primary market is a source of new securities. Investors purchase securities directly from the issuing company or government. Companies sell stocks and bonds to fund business improvements or expand operations. Governments sell bonds only. This newly issued distribution of securities is known as IPO’s or initial public offerings. Although an investment bank may set the securities’ initial price and receive a fee for facilitating sales, most of the money raised from the sales goes to the issuer.
Investors typically pay less for securities on the primary market than on the secondary market.
After the initial offering is completed, the securities are then sold on the Secondary Market.
What is the purpose of the secondary market?
In the secondary market investors trade securities that have already been issued by companies and governments. Buyers and sellers trade among each other at a price that is mutually beneficial. The issuing company doesn’t receive any proceeds from these transactions. Prices in the secondary market are determined by supply and demand.
Can you list 5 exchanges in Canada?
TSX, TSX Venture Exchange, Montreal Exchange, Canadian Securities Exchange, NEO Exchange
What is an electronic trading system?
An electronic market that provide automated matching and execution of trades in both equity and fixed income. In an equity trading system they can carry out all the same functions as traditional exchanges except they cannot themselves list securities.
Can you describe how an Alternative Trading System functions?
There are both equity electronic trading systems and fixed income trading systems.
Who are CanDeal, CBID, and CanPX?
They are all Fixed Income trading operations
