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Canadian Securities Course V1 > Chapter 2: The Capital Market > Flashcards

Chapter 2: The Capital Market Flashcards

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SIE Exam flashcards
1
Q

Name the 3 most important elements in the securities industry.

A
  1. Financial intermediaries (like investment dealers)
  2. Financial markets
  3. Financial instruments
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2
Q

What is “capital”?

A

Capital = wealth

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3
Q

How is “capital” measured? (2)

A
  1. Physical assets

2. Representational items (like stocks and bonds)

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4
Q

“Representational capital” breaks down into which 2 different types of investments?

A
  1. Direct investment

2. Indirect investment

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5
Q

What are examples of “direct investment”?

A

Purchase a house, government investment in roads, starting new business, etc.

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6
Q

Name the 3 important characteristics of capital.

A
  1. Mobility
  2. Sensitivity to environment
  3. Scarcity
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7
Q

What are examples of “indirect investments”?

A

Purchase a stock/bond, deposit money in a bank, etc.

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8
Q

The flow of investment capital between countries is guided by country risk evaluation, which includes an analysis of? (6)

A
  1. The political environment
  2. Economic trends
  3. Fiscal policy
  4. Monetary policy
  5. Investment opportunities
  6. The labour force
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9
Q

What is the only source of capital?

A

Savings

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10
Q

When is an individual a supplier of capital?

A

When revenues exceed expenditure (delaying consumption)

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11
Q

When is an individual a user of capital?

A

When making purchases

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12
Q

When is a non-financial corporation a supplier of capital?

A

When generating large savings through revenues (typically not a significant source because funds are usually reserved for company’s own business use)

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13
Q

When is a non-financial corporation a user of capital?

A

When funding day-to-day operations, expansions, etc.

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14
Q

When is the government a supplier of capital?

A

When operating at a surplus, which is invested.

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15
Q

When is the government a user of capital?

A

When borrowing capital via bond issuance.

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16
Q

When is a financial institution a supplier of capital?

A

Not considered supplier because they are lending someone else’s money to a user of capital.

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17
Q

When is a financial institution a user of capital?

A

Banks are not users of capital; they are financial intermediaries that transfer capital from suppliers to users.

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18
Q

Name financial instruments and provide examples of each. (5)

A
  1. Fixed-income securities (bonds, debentures, etc.)
  2. Equity securities (preferred shares, common shares, etc.)
  3. Derivatives (options, future contracts, etc.)
  4. Managed products (mutual funds, exchange-traded funds, private equity funds, etc.)
  5. Structured products (principle-protected note, index-linked guaranteed investment certificate)
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19
Q

What are “structured products”?

A

Structured product is a financial instrument that is a financially engineered investment product with the characteristics of a bond, equity, and investment fund.

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20
Q

Name the 3 financial markets.

A
  1. Money market
  2. Bond market
  3. Equity market
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21
Q

What is a primary market?

A

Market where security is first issued by a corporation/government and sold to an investor.

22
Q

What can the 3 financial markets (money market, bond market, and equity market) be categorized into? (2)

A
  1. Primary market

2. Secondary market

23
Q

What is a secondary market?

A

Where securities, ones that have been issued on the primary market, are traded by investors on mutually agreed prices

24
Q

What is an auction market?

A

Marketplace where buyers and sellers of securities trade via bid and ask prices and where prices are determined by supply and demand. Ultimately, trades are settled at a mutually agreed upon price between the buyer and the seller.

25
Q

How are prices agreed upon between a buyer and seller in an auction market?

A

Bid and ask process

26
Q

Bid

A

The highest price a buyer is willing to pay.

27
Q

Ask

A

The lowest price a seller is willing to accept.

28
Q

Spread

A

The difference between the bid and ask price.

29
Q

Last price

A

The price at which the last trade on the security took place.

30
Q

Another name for “last price”?

A

Market price

31
Q

The conditions for a “liquid market”? (3)

A
  1. Frequent sales
  2. Small price spreads between bid and ask prices
  3. Small price fluctuations from sale to sale
32
Q

The opposite of a “liquid market”.

A

Thin market

33
Q

The opposite of a “thin market”.

A

Liquid market

34
Q

Exchanges in Canada (9).

A
  1. Toronto Stock Exchange (TSX)
    senior equities, income trusts, ETFs, debt instruments
  2. Toronto Venture Exchange
    junior equities and some debentures
  3. TSX Alpha Exchange:
    offers trading in some securities listed on TSX and Toronto Venture Exchange
  4. The Montreal Exchange (Bourse de Montreal)
    trades all financial and equity futures and options
  5. The Natural Gas Exchange
    trading mechanism for North American natural gas and electricity markets
  6. The Canadian Securities Exchange
    lists equities of emerging companies
  7. ICE Futures Exchange
    trades agricultural futures and options
  8. Aequitas NEO Exchange
    provides listing services and facilitates the trading of securities on Aequitas NEO exchange and TSX and TSX venture exchange
  9. The Nodal Exchange
    a derivative exchange that provides contracts to North American energy market participants
35
Q

Markets are most likely characterized as…?

A
  1. Auction markets

2. Dealer markets

36
Q

What are dealer markets?

A

Consists of a network of dealers who trade with each other either through a computer network/over the telephone.

37
Q

Auction market vs. dealer market bid and ask process

A

Auction market: individual buyers and sellers bid and ask prices are entered

Dealer market: actual dealers post the bid and ask prices (act as market makers) and trades are not listed on an organized exchange

38
Q

Most of bonds and securities are sold through which market?

A

Dealer market

39
Q

Why might company shares be traded OTC instead of at an exchange?

A
  1. Does not meet 1+ exchange requirements
  2. Low investor interest
  3. Low volume of trading in its shares
  4. Too expensive
  5. Does not want to comply with exchange rules
40
Q

Where do most unlisted stocks trade?

A

OTC via network of dealers

41
Q

Characteristics of OTC derivatives market?

A
  1. Open 24 hours
  2. Dominated by financial institutions
  3. No trading floor; trades take place directly between dealers
42
Q

How do derivatives trade? (2)

A
  1. Exchanges (trades are standardized)

2. Some trade OTC (customized to suit buyer and seller)

43
Q

How are unlisted securities reported?

A

Not required to be reported in Canada EXCEPT Ontario (reported through Canadian Unlisted Board Inc. web-system)

44
Q

What is alternative trading system (ATS)?

A

Privately owned computerized trading systems that match and buy sell orders. ATS can be owned by 1+ brokerage firms and compete with other ATS.

45
Q

What are the requirements and functions of an equity electronic trading system (equity ATS)?

A
  1. Must be registered as an investment dealer and member of an SRO.
  2. Cannot fulfil all the same functions as traditional exchanges (ie. cannot list securities)
46
Q

Majority of bonds and money market securities are sold through?

A

Dealer markets, including electronic trading systems

47
Q

CanDeal

A

ATS

  • Member of the IIROC
  • Operated by TMX Group and joint venture between Canada’s largest dealers
  • Itself is an investment dealer
  • Offers institutional investors access to government and money market securities
48
Q

CBID

A

ATS

- Operates two fixed-income marketplaces (retail and institutional)

49
Q

MarketAxess

A

ATS

  • Member of IIROC that operates in Quebec and Ontario
  • Provides data and a trading platform with access to competitive pricing through multiple dealers for a wide range of fixed-income instruments
50
Q

CanPX

A

ATS

  • Joint venture with several IIROC member firms
  • Provides investors with real-time bid and offer prices with volume information on Government of Canada (GOC) bonds and Treasury bills

Canadian Securities Course V1 (10 decks)

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