Chapter 2 - The Capital Market (Done) Flashcards
What is investment capital?
Investment capital refers to funds used by individuals or companies to purchase assets or invest in businesses. This capital is typically used to generate future income or profit. Investment capital can come from various sources, including personal savings, loans, or funds raised from investors.
What are the three characteristics of capital?
- Durability: Capital assets have a long life and can be used over several years.
- Mobility: Capital can be transferred or moved from one use to another, making it flexible.
- Productivity: Capital is used to produce goods and services, contributing to the production process.
Can you explain the difference between direct and indirect investment? What are some examples of each?
- Direct Investment: This involves investing directly in a company or asset, such as purchasing stocks or real estate. For example, buying shares in a company’s stock or investing in a property.
- Indirect Investment: This involves investing through intermediaries, such as mutual funds or pension funds, which then invest in companies or assets on behalf of the investor. For example, investing in a mutual fund that holds a diversified portfolio of stocks.
What are the sources of capital?
- Equity Financing: Funds raised by selling shares of stock in the company.
- Debt Financing: Funds borrowed from lenders, typically in the form of loans or bonds.
- Retained Earnings: Profits that a company reinvests in its operations instead of distributing to shareholders as dividends.
- Government Grants and Subsidies: Funds provided by the government to support businesses.
Who are the users of capital? How does each user use capital in the economy?
- Businesses: Use capital to invest in equipment, technology, and expansion, which helps increase production and efficiency.
- Individuals: Use capital for personal investments, such as purchasing homes or investing in education, which can improve their financial well-being.
- Governments: Use capital to fund infrastructure projects, public services, and social programs, contributing to overall economic development.
What are debt instruments?
Debt instruments are financial assets that represent a contractual obligation for the issuer to repay a lender. Examples include bonds, loans, and mortgages. These instruments typically involve regular interest payments and the return of principal at maturity.
What are equities?
Equities represent ownership interest in a company. When an investor buys shares of a company’s stock, they own a portion of that company and may receive dividends and voting rights. Equities can appreciate in value, providing capital gains to the investor.
What role do the financial markets play in Canada?
Financial markets in Canada facilitate the allocation of capital by allowing investors to buy and sell securities such as stocks, bonds, and other financial instruments. They provide liquidity, enable price discovery, and help manage risks. These markets support economic growth by funding businesses and government projects.
Can you compare auction markets to dealer markets?
- Auction Markets: Buyers and sellers come together to bid on securities, and transactions occur at the highest bid price or lowest ask price. An example is the Toronto Stock Exchange (TSX).
- Dealer Markets: Dealers (market makers) provide liquidity by buying and selling securities from their own inventory, quoting buy and sell prices. An example is the NASDAQ.
What is the purpose of the primary market?
The primary market is where new securities are issued and sold for the first time. It allows companies and governments to raise capital by selling stocks, bonds, or other financial instruments to investors.
What is the purpose of the secondary market?
The secondary market is where previously issued securities are bought and sold among investors. It provides liquidity, enabling investors to trade securities easily. It also helps in price discovery and valuation of securities.
Can you list 5 exchanges in Canada?
- Toronto Stock Exchange (TSX)
- TSX Venture Exchange
- Montreal Exchange (ME)
- Canadian Securities Exchange (CSE)
- NEO Exchange
What is an electronic trading system?
An electronic trading system is a platform that uses computer networks to facilitate the trading of financial instruments. It allows traders to place orders and execute trades electronically, improving speed, efficiency, and transparency in the market.
Can you describe how an Alternative Trading System functions?
An Alternative Trading System (ATS) is a non-exchange trading venue that matches buyers and sellers to trade securities. ATSs operate parallel to traditional exchanges, often offering lower fees and faster execution. They provide additional liquidity and trading options for investors.
Who are CanDeal, CBID, and CanPX?
- CanDeal: A Canadian electronic trading platform for debt securities, providing institutional investors with access to a variety of fixed-income products.
- CBID (Canadian Bond Exchange): A platform for trading fixed-income securities, facilitating electronic bond trading for institutional investors.
- CanPX: A system that provides real-time price information and transparency for Canadian debt securities.
