Chapter 2: The Capital Market Flashcards
Name the 3 most important elements in the securities industry.
- Financial intermediaries (like investment dealers)
- Financial markets
- Financial instruments
What is “capital”?
Capital = wealth
How is “capital” measured? (2)
- Physical assets
2. Representational items (like stocks and bonds)
“Representational capital” breaks down into which 2 different types of investments?
- Direct investment
2. Indirect investment
What are examples of “direct investment”?
Purchase a house, government investment in roads, starting new business, etc.
Name the 3 important characteristics of capital.
- Mobility
- Sensitivity to environment
- Scarcity
What are examples of “indirect investments”?
Purchase a stock/bond, deposit money in a bank, etc.
The flow of investment capital between countries is guided by country risk evaluation, which includes an analysis of? (6)
- The political environment
- Economic trends
- Fiscal policy
- Monetary policy
- Investment opportunities
- The labour force
What is the only source of capital?
Savings
When is an individual a supplier of capital?
When revenues exceed expenditure (delaying consumption)
When is an individual a user of capital?
When making purchases
When is a non-financial corporation a supplier of capital?
When generating large savings through revenues (typically not a significant source because funds are usually reserved for company’s own business use)
When is a non-financial corporation a user of capital?
When funding day-to-day operations, expansions, etc.
When is the government a supplier of capital?
When operating at a surplus, which is invested.
When is the government a user of capital?
When borrowing capital via bond issuance.
When is a financial institution a supplier of capital?
Not considered supplier because they are lending someone else’s money to a user of capital.
When is a financial institution a user of capital?
Banks are not users of capital; they are financial intermediaries that transfer capital from suppliers to users.
Name financial instruments and provide examples of each. (5)
- Fixed-income securities (bonds, debentures, etc.)
- Equity securities (preferred shares, common shares, etc.)
- Derivatives (options, future contracts, etc.)
- Managed products (mutual funds, exchange-traded funds, private equity funds, etc.)
- Structured products (principle-protected note, index-linked guaranteed investment certificate)
What are “structured products”?
Structured product is a financial instrument that is a financially engineered investment product with the characteristics of a bond, equity, and investment fund.
Name the 3 financial markets.
- Money market
- Bond market
- Equity market
What is a primary market?
Market where security is first issued by a corporation/government and sold to an investor.
What can the 3 financial markets (money market, bond market, and equity market) be categorized into? (2)
- Primary market
2. Secondary market
What is a secondary market?
Where securities, ones that have been issued on the primary market, are traded by investors on mutually agreed prices
What is an auction market?
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.
