Chapter 2 | The Capital Market Flashcards
_______ investment occurs when a person or entity with accumulated savings buys the securities issued by a government or corporation, which in turn invests the funds it receives directly for a productive purpose.
ANSWER: INDIRECT INVESTMENT occurs when a person or entity with accumulated savings buys the securities issued by a government or corporation, which in turn invests the funds it receives directly for a productive purpose.
CAPITAL CHARACTERISTICS?
Capital has three important characteristics: mobility, sensitivity to its environment, and scarcity.
GIVE THREE EXAMPLES
OF INDIRECT INVESTMENT?
ANSWER:
An investor buys stocks or bonds.
A parent invests in an education savings plan.
A couple deposits their savings at a bank.
GIVE THREE EXAMPLES OF
DIRECT INVESTMENT?
ANSWER:
A couple invests their savings in a home.
A government invests in a new highway.
A company pays start-up costs for a new plant.
FACTORS TO CONSIDER WHEN
EVALUATING COUNTRY RISK?
ANSWER:
POLITICAL ENVIRONMENT
ECONOMIC TRENDS
FISCAL POLICY
MONETARY POLICY
INVESTMENT OPPORTUNITIES
NOTE ONLY
Because capital is scarce, it is in great demand everywhere in the world. And because it is mobile and sensitive, it moves in or out of countries or localities in anticipation of changes to taxation, exchange rates, trade barriers, regulations, and government attitudes.
It tends to move to areas where it can be best used and where it can avoid less favourable conditions. In other words, capital always moves towards uses and users that offer the highest risk adjusted returns.
NOTE ONLY
Because capital is scarce, it is in great demand everywhere in the world. And because it is mobile and sensitive, it moves in or out of countries or localities in anticipation of changes to taxation, exchange rates, trade barriers, regulations, and government attitudes.
It tends to move to areas where it can be best used and where it can avoid less favourable conditions. In other words, capital always moves towards uses and users that offer the highest risk adjusted returns.
NOTE ONLY
An adequate supply of capital is essential for Canada’s well-being. In manufacturing, for example, capital provides the means to expand facilities, improve productivity, increase competitiveness in domestic and foreign markets, and develop innovative, sought-after new products. When capital investment is deficient, industry slackens, unemployment rises, and living standards decline.
NOTE ONLY
An adequate supply of capital is essential for Canada’s well-being. In manufacturing, for example, capital provides the means to expand facilities, improve productivity, increase competitiveness in domestic and foreign markets, and develop innovative, sought-after new products. When capital investment is deficient, industry slackens, unemployment rises, and living standards decline.
List four suppliers of capital?
ANSWER:
Individuals
Non-financial domestic corporations
Governments
Foreign investors
This represents some form of ownership stake in the company that issued them.
ANSWER: Equity Securities
This is a financial product whose value is derived from the value of an underlying instrument, such as a stock or an index.
Unlike stocks and bonds, these financial products are more suited to sophisticated investors.
ANSWER: Derivatives
A ________ product is a financially engineered product with the characteristics of debt, equity, and an investment fund.
ANSWER: A STRUCTURED PRODUCT is a financially engineered product with the characteristics of debt, equity, and an investment fund.
Give two examples of structured products?
ANSWER:
- Principal-protected notes
- Index-linked guaranteed investment certificates
A _ _ _ _ _ _ _ _ _ provides a forum in which buyers and sellers meet. Instead of meeting face to face, intermediaries such as investment advisors and bond dealers act on their clients’ behalf.
A FINANCIAL MARKET provides a forum in which buyers and sellers meet. Instead of meeting face to face, intermediaries such as investment advisors and bond dealers act on their clients’ behalf.
PRIMARY MARKETS?
PRIMARY MARKETS
In the primary market, newly issued securities are sold by companies and governments to investors. In other words, investors purchase securities directly from the issuing company or government. Companies raise capital by selling stocks or bonds, whereas governments sell bonds only. These newly issued distributions of securities are known as IPOs, or initial public offerings.
SECONDARY MARKET
In the secondary market, investors trade securities that have already been issued by companies and governments. In this market, buyers and sellers trade among each other at a price that is mutually beneficial to both parties, and securities are transferred from the seller to the buyer.
The issuing company does not receive any of the proceeds from transactions in the secondary market; it receives payment only when the securities are first issued in the primary market. An example here is the buying and selling of stocks on the Toronto Stock Exchange.
A __________ is an auction market where buyers and sellers of securities meet to trade with each other and where prices are established according to the laws of supply and demand.
A STOCK EXCHANGE is an auction market where buyers and sellers of securities meet to trade with each other and where prices are established according to the laws of supply and demand.
What financial instruments trade on the Toronto Stock Exchange?
ANSWER: The Toronto Stock Exchange (TSX) lists equities, some debt instruments that are convertible into a listed equity, income trusts, and exchange-traded funds.
