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afm 121 > unit 1 | the capital market > Flashcards

unit 1 | the capital market Flashcards

1
Q

what is the capital market?

A

help facilitate transfer of capital

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2
Q

what is capital?

A

money that is bought & sold

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3
Q

3 components of wealth transfer process:

A
  1. financial instruments (what is actually bought & sold)
  2. financial markets (facilitate buying/selling of #1)
  3. financial intermediaries (people & companies involved with #1 & #2)
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4
Q

who are the suppliers of investment capital?

A

savings of individuals, corporations & government

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5
Q

how is capital utilized/transferred/invested?

A

direct and indirect investment

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6
Q

define direct investment

A

investing in asset that generates wealth (land, real estate, equipment)

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7
Q

financial assets involved with indirect investment:

A
  • stocks/shares/equity (ownership of a company)
  • bonds/fixed income (debt of a company)
  • treasury bills (debt of a government)
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8
Q

define indirect investment

A

companies & governments issue financial assets & receive funds, which are invested directly

investors buy these financial assets to generate a return

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9
Q

describe the concept of efficient allocation of capital

A

capital is mobile, scarce, and sensitive, so people will only transfer/invest if it is easy, cheap, and generates a good return

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10
Q

what factors can capital flow depend on?

A
  • political environment (stable government or banana republic)
  • economic trends
  • fiscal policy (government spending & taxation)
  • monetary policy (government by central banks)
  • investment opportunities
  • labour force (highly educated/laws governing rights of labour force)
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11
Q

sources of capital

A
  1. retail investors (individuals)
  2. institutional investors (pension funds - canada pension plan investment board, ontario teachers | mutual funds - trimark, AGF)
  3. foreign investors (foreign retail, institutional, and government investors)
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12
Q

how does foreign investors transfer capital?

A

investments are made directly in canadian firms or through stocks/bonds for canadian firms listed on foreign exchanges

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13
Q

who are the users of capital?

A
  1. individuals don’t (if needed will go to bank for loan)
  2. companies/businesses
    — earn money internally through existing operations & reinvest the money
    — raise money by issuing stocks/bonds (to generate high return to invest back into operations)
  3. Governments (federal, provincial, municipal) issue debt
    — Treasury bill (debt due in less than 1 year)
    — Longer term debt
    — Canada Savings Bonds (federal/provincial only)
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14
Q

what are funds that companies receive invested in?

A

new products/markets/machinery that they hope will grow the company more & generate additional returns

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15
Q

define bonds

A

company getting loaned money to invest in operations (need to pay back)

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16
Q

define fixed income

A

investment with fixed interest/dividend payment until maturity date (ex. pension) company to investors

17
Q

what are funds that governments receive invested in?

A
  • All forms of government spending that aren’t covered by tax & other revenues
  • Healthcare, education, infrastructure spending (roads, sewers, water)
18
Q

define debt as a financial instrument

A
  • Funds are borrowed
  • At a specific date (maturity date) these funds are paid back
  • Between the borrowing date & the maturity date, interest payments are made
19
Q

define equity as a financial instrument

A
  • Typically represented by stock/shares in a company
  • Claims partial ownership of company
  • Voting privileges
  • Receive regular dividend payments (but not necessarily)
20
Q

Investment Funds

A

Buys & sells stocks/bonds → typically through a mutual fund

21
Q

Derivatives

A

These products derive their value from another asset (stock, bond, commodity, currency)
- The option price to buy TD Bank stock will fluctuate up & down
Often used for hedging (ie. mitigate the effect of a strong C$ or higher oil prices)

22
Q

Private Equity

A
  • Invest in both debt & equity
  • Investments made directly in companies (not through purchases of stock/bonds)
  • Funds are provided by pension funds, endowments, wealthy individuals
23
Q

why are financial markets necessary?

A

Financial instruments only work well if accompanied by efficient markets

24
Q

define “efficient”

A
  • Fast (can a stock be sold/bought with minimal delay)
  • Cheap (low fees to buy/sell)
  • Liquid (are there many buyers & sellers)
25
Q

Primary markets

A
  • Securities (shares or bonds) are sold by issuers for the first time
  • The issuer receives money from this sale
  • May be IPO or subsequent equity offering
26
Q

Secondary markets

A

(most financial instruments are sold and bought here)
- Securities previously issued (in primary markets) are bought & sold
- Note: fund does not go to issuer
Ex: If I buy 100 shares of TD Bank on the TMX today, the funds go to the shareholder who sold me the shares (not TD Bank)

27
Q

Financial Intermediaries

A

People & companies that improve market efficiency by facilitating the flow of capital from buyers to sellers
- Financial intermediaries may work in self interest
- Regulations are structured such that market efficiency is a by-product of this self-interest

27
Q

examples of Financial Intermediaries

A

Bank of Canada
Banks
Insurance companies
Pension funds
Investment dealers
Private equity/Venture capital firms
(Not all of these companies operate for the purpose of “market efficiency”)

27
Q

Initial Public Offering

A

First time a company sells its shares to the public & its shares are listed on a stock exchange (TSX)

28
Q

why do financial crisis occur?

A

The financial crises exposed areas where firms were working in self-interest & also working against market efficiency/a productive economy

28
Q

Auction Markets

A
  • Where items are bought & sold (Ex. stock exchange)
  • Where all transactions converge in one location (80 exchanges in 60+ countries)
29
Q

How does a stock exchange make money

A
  • Transaction fees (if you buy or sell a stock - you pay a fee)
  • Initial listing fees (if a company conducts an IPO - they pay a fee)
  • Fees from companies making capital structure changes
  • Sale of historic data
30
Q

Stock exchange trends

A
  • Stock exchanges have largely transferred from physical locations to trading systems
  • As a result, speed & cost efficiency are crucial
  • Stock exchanges around the world have been joining together (through mergers & acquisitions) to become “bigger & better”
31
Q

what does being efficient mean to corporations stating their future?

A

cutting cost to generate profit

afm 121 (12 decks)

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