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Investments funds in Canada > Olivera Winkelaar-Ch2 > Flashcards

Olivera Winkelaar-Ch2 Flashcards

Overview of the Canadian Financial Marketplace - Ch2

1
Q

What is Capital?

A

Capital is wealth. You can have:

  1. Direct Capital - Personal Savings, Government funds ( investing in a hospital or highway), or company investing in a startup plant.
  2. Indirect Capital - Stocks, bonds, mutual funds or deposits of savings in a financial institutions.
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2
Q

What are the characteristics of Capital

A
  1. mobile
  2. sensitive
  3. scarce
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3
Q

The decision as to where capital will flow is guided by country risk evaluation, what is analyzed to determine this?

A
  1. Political environment - likely to bee involved in internal or external conflict.
  2. Economic trend - growth in gross domestic product, inflation rate, levels of economic activity
  3. Fiscal policy - Levels of taxes and government spending and the degree it encourages savings and investments
  4. Monetary policy - the sound management of the growth of the nation’s money supply and the extent to which it promotes price and foreign exchange stability.
  5. Investment opportunities - opportunity to invest and satisfactory returns on investments
  6. Characteristics of the labor force - weather is skilled and productive
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4
Q

What is the source of Capital.

A

The only source of Capital is Savings and it can come from:

  1. Retail Investors
  2. Institutional Investors
  3. Foreign Investors
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5
Q

Who are Retail Investors

A

Are individual investors who buy and sell securities for their own personal accounts, and not for another company or organization.

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6
Q

Who are Institutional Investors?

A

Are organizations, such as a pension fund or mutual fund company, that trade large volumes of securities and typically have a steady flow of money to invest. Retail investors generally buy in smaller quantities than larger , institutional investors.

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7
Q

Who are Foreign investors?

A

Are a significant source of investment capital. Canada has depended upon large inflows of foreign investment for continued growth. Foreign direct investment in Canada has depended to concentrate in particular industries: manufacturing, petroleum and natural gas, and mining and smelting. Some industries also have restrictions with respect to foreign investments.

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8
Q

Who are users of Capital?

A

Users of Capital are:
1. Individuals
2. Businesses- to raise funds they issue short term money market papers, medium and long term debt, and preferred and common shares
3. Governments a. Federal government ( issue T-bills,
CSBs, CPBc (p-premium)
b. Provincial government(issue bonds to
federal government or borrow funds
from CPP )(the can also issue T-bills
and their own Saving Bonds)
c. Municipal government (issue
installments debentures or serial
debentures
These can be Canadian of foreign users.

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9
Q

Sources of Capital

A

Capital represents the savings of individuals, corporations and governments. It is mobile, scarce and valuable. Capital flows toward attractive and stable economic environments where it can be used successfully. Its efficient use promotes economic growth.

Assess your understanding of the sources by answering the following questions.

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10
Q

How does capital investment affect Canada’s growth?

A

When capital investment declines, the result is insufficient output, diminishing productivity, rising unemployment and decreasing competitiveness in domestic and international markets, all of which lead to lower living standards. Sufficient capital ensures that Canada has enough productive capacity in place to compete in the global economy.

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11
Q

How do corporations rate as sources of capital?

A

Corporations tend to retain their earnings and issue securities to finance their own operations and growth. Thus, corporations are not an important source of capital—they are seen as users of capital.

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12
Q

Do non-residents of Canada consider Canada a good place to invest?

A

Generally, yes. Non-residents tend to invest in Canadian industries, particularly manufacturing, petroleum and natural gas, and mining and smelting. Controls on some industries, such as the financial industry, could be eased to encourage more foreign investment.

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13
Q

Why do we need formal financial instruments called securities

A

Its a way of distributing capital in a large, sophisticated economy. Securities are formal, legal document that set our the rights and obligations of the buyers and sellers. Furthermore there are many types of securities.

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14
Q

What are financial instruments?

A
  1. Debt instruments
  2. Equity instruments
  3. Investments instruments
  4. Derivative instruments
  5. Other Financial instruments
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15
Q

What are Debt instruments?

A
  1. Mortgages
  2. Bonds
  3. Debentures
  4. T-bills
  5. Commercial papers
  6. Fixed income securities
    The issuer promises to repay the loan at maturity and in the interim makes interest payments to the investor.
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16
Q

What are Equity Instruments?

A

Are usually referred as stocks or shares because the investor actually buys a “share” of the company, thus gaining ans ownership stake in the company. Is the company does well he value of the shares rise and when the shares are sold a capital gain is received for the greater value of the shares. Also the company may distribute part of its profit to shareholders in form of dividends. However this is not obligatory.

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17
Q

What are Investment Funds?

A

Is a company or trust that manages investments for its clients. The most common form is the open-end fund, also known as a mutual fund. The fund raises capital by selling shares or units to investors and than invests that capital. As a unitholders, the investors receive part of the money made from the fund’s investments.

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18
Q

What are derivatives?

A

They are suited only for sophisticated investor. They are products based on or derived from an underlying instrument, such as a stock or an index. The most common derivatives are options and forwards.

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19
Q

What are other financial Instruments?

A

Financial engineered structured products that have various combinations of characteristics of debt, equity and investment funds. Ex:

  1. Notes
  2. Exchange-traded funds (ETFs)
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20
Q

What is a financial market?

A

It provides a forum where buyers and sellers meet. A well organized market provides speedy transactions and low transaction costs, high degree of liquidity and effective regulations. In a security market buyers and sellers do not meet face to face.

21
Q

In what two markets are securities sold in Canada?

A

In Canada all exchanges are electronic. In addition, securities are sold in:

  1. Primary markets
  2. Secondary markets
22
Q

What is a Primary market?

A

Only new securities are sold by companies and government to investors for the first time. Companies can raise capital by selling stocks or bonds to investors while governments raise capital by selling bonds.

23
Q

What are Initial public offering (IPO)?

A

When a company issues stocks for the first time in primary market.

24
Q

What is a Secondary market?

A

Investors trade securities that have already been issued by companies and governments.
The issuing company does not receive any of the proceeds from transactions in the secondary market.

25
Q

What is a Auction Markets in Canada?

A

Markets can also be divided into auction and dealer markets. In an auction market, buyers enter bids an sellers enter offers for a stock. The price at which a stock is traded represents the highest price the buyer is willing to pay (the bid price) and the lowest price the seller is willing to accept (the ask price). These orders are than channeled to a single central market and compete against each other.

26
Q

What is the stock exchange?

A

Is a marketplace where buyers ans sellers of securities meet to trade with each other and where prices are established according to the laws of supply and demand.

27
Q

How is a liquid market characterized?

A

Liquidity is fundamental to the operation of an exchange. Its characterized by:

  1. Frequent sales
  2. Narrow price spread between bid and ask price
  3. Small price fluctuations from sale to sale.
28
Q

What are the exchanges in Canada?

A
  1. Toronto Stock Exchange ( TSX)
  2. TSX Venture Exchange
  3. Alpha Exchange
  4. Montreal Exchange
  5. Natural Gas Exchange (NGX)
  6. Canada Securities Exchange (CSE)
  7. ICE Futures Canada
29
Q

What does TSX trade in?

A
  1. Senior equities
  2. Some debt instruments
  3. Income trusts
  4. Exchange-Trade funds (ETFs)
30
Q

What does TSX Venture Exchange trade in?

A
  1. Junior securities

2. Few debenture issues

31
Q

What does Alpha Exchange trade in?

A
  1. Equities
  2. Debentures
  3. Exchange-trade funds
  4. Structured products
    This exchange also offers all the securities listed in the TSX and TSX
32
Q

What does CSE trade in?

A

Securities of emerging companies

33
Q

What does Montreal Exchange trade in?

A

All financial and equity futures and options

34
Q

What does Natural Gas Exchange trade in?

A

Provides electronic trading central counter party clearing and data services to the North American natural gas and electricity markets.

35
Q

What is a dealer markets?

A

They are the second major type of market on which securities trade. They consist of a network of dealers who trade with each other, usually over the telephone or over a computer network. A dealer market is a negotiated market where only the dealers’ bid and ask questions are entered by those dealers.

36
Q

What do Dealer markets trade in?

A

Almost all bonds and debentures are sold through dealer markets.
Dealers market are also referred to as over-the-counter (OTC) or as unlisted markets - securities on these markets are not listed on an organized exchange as thy are on auction markets.

37
Q

What is the objectives of regulation are:

A

The financial Intermediaries play a pivotal role in the economy and as such is one of the most regulated sectors in the country.

The objectives of regulation are:

To ensure the integrity, safety, and soundness of financial institutions and markets,
To help minimize crises and company failures,
To protect investors, depositors, and policy holders.

38
Q

What is CSA?

A

n Canada, the securities industry is provincially regulated. There are 13 securities regulators that joined together to form the Canadian Securities Administrators (CSA). The objective of the CSA is to harmonize regulation of the Canadian markets. Its mission is to give Canada a securities regulatory system that protects investors from unfair, improper, or fraudulent practices and that fosters fair, efficient, and vibrant capital markets.

The CSA brings provincial and territorial securities regulators together to share ideas and work at designing policies and regulations that are consistent across the country and ensure the smooth operation of Canada’s securities industry. By collaborating on rules, regulations, and other programs, the CSA helps avoid duplication of work and streamlines the regulatory process for companies seeking to raise investment capital and others working in the investment industry.

39
Q

What is Investment Industry Regulatory Organization of Canada (IIROC)

A

IIROC oversees all investment dealers and trading activity in Canada and all Canadian investment dealers must be members of IIROC. IIROC carries out its regulatory responsibilities through setting and enforcing rules regarding the proficiency, business and financial conduct of investment dealers and their registered employees and through setting and enforcing market integrity rules regarding trading activity on Canadian marketplaces.

Website: http://www.iiroc.ca/

40
Q

What is Mutual Fund Dealers Association (MFDA)

A

The MFDA is the national self-regulatory organization of the mutual fund industry. The MFDA regulates the operations, standards of practice and business conduct of its Members and their representatives with a mandate to enhance investor protection and strengthen public confidence in the Canadian mutual fund industry.

Website: http://www.mfda.ca/

41
Q

The Canadian Regulatory Environment: Self-Regulatory Organizations (SROs)
The SROs in Canada include:

A
  1. Investment Industry Regulatory Organization of Canada (IIROC)
  2. Mutual Fund Dealers Association (MFDA)
42
Q

Who are the different financial Intermediaries?

A
  1. Banks
  2. Trust companies
  3. Insurance companies
  4. Pension funds
43
Q

What are the two categories that the intermediaries can be divided into?

A
  1. Deposit-taking: such as Banks and Trust companies, they will deposit savings, lend and invest funds to their consumers
  2. Non-deposit-taking institutions: such as insurance companies and investment dealers.
44
Q

Whats the role of an investment dealer?

A
  1. Agent in transferring instruments from the buyer and seller
  2. Brokers - they maintain the secondary markets. If securities can’t be bought and sold easily investors would not buy securities in the primary market.
45
Q

Explain what is meant by a financial intermediary. Give examples of two financial intermediaries.

A

Market access is organized through companies known as financial intermediaries. The term “intermediary” is used to describe any organization that facilitates the trading or movement of the financial instruments that transfer capital between suppliers and users. One such intermediary is a bank which gathers funds from suppliers in the form of saving deposits or GICs and transfers them to users in the form of mortgages, car loans and other lending instruments. Other intermediaries, such as insurance companies, collect funds and then invest them in bonds, equities, real estate, etc., to meet their clients’ needs for financial security.

46
Q

Give an example of how each of the following can be both a supplier and user of capital.

a) Governments
b) Companies
c) Individuals

A 
Governments are (net) suppliers of capital when they run budget surpluses; they are users of capital if they run budget deficits.
Companies are suppliers of capital when they buy T-bills for short-term investments; they are users of capital when they issue shares or negotiate loans.
Individuals are suppliers of capital when they put money in their savings accounts or buy shares (units) of a mutual fund; they are users of capital when they take out a loan or a mortgage.
47
Q

Who is responsible for creating and enforcing securities legislation?

A

While there are federal laws against fraud and other criminal acts, specific legislation regarding securities is enacted and enforced at the provincial level by each province’s securities commission. In Ontario, for example, this is the Ontario Securities Commission (OSC).

48
Q

What is the difference between a provincial securities commission and a self-regulatory organization?

A

Provincial regulatory bodies create their own laws to regulate the securities industry in their province. SROs are private industry organizations that have been granted the privilege of regulating their own members by the provincial regulatory bodies. SROs are responsible for enforcement of their members’’ conformity with securities legislation and have the power to prescribe their own rules of conduct and financial requirements for their members.

49
Q

What are the broad classes or categories of financial instruments?

A

The main classes or categories of financial instruments are debt, equity, investment funds, derivatives and other financial instruments. These instruments are traded among suppliers and users of capital on the financial markets.

Investments funds in Canada (2 decks)

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