Ch. 1 - The Capital Market Flashcards Preview

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Flashcards in Ch. 1 - The Capital Market Deck (24):

What are the characteristics of Capital?

1- Mobility: can be easily moved from one investment to another, one country to another, etc. 2- Sensitivity to its environment: will move to safer environment unless return adequately rewards the risk incurred.


What is the only source of capital?

Savings - when earnings exceed expenditures, non-financial institutions, individuals, governments & foreigners, have savings to invest.


Who/ what can be suppliers of capital?

1- Non-financial institutions 2- Individual investors (also called- retail customers) 3- Institutional investors: pension funds, mutual funds, etc. 4- Governments 5- Non-residents (foreigners)


Who are the users of capital?

3 'BIG' Users B: business I: individuals G: government


What are the 4 different types of financial instruments?

1- Debt instruments: bonds & debentures 2- Equities: common & preferred shares 3- Derivatives: warrants, rights, options, futures 4- Investment funds: open-ended & closed-ended


Capital can be transferred from supplies of capital to users of capital via financial markets. Describe the difference between the 'primary market' and 'secondary market'.

Primary market: - market on which security is first offered (IPO-initial public offering) - money goes to company Note: Governments raise money by selling T-bills, bonds, etc. Secondary market: - trading between investors - company receives no money


What are the 3 characteristics of a 'liquid market'?

1- frequent sales 2- small price spreads between bid and ask prices 3- small price fluctuations from sale to sale


What is the opposite of a 'liquid market'?

A 'thin market' - infrequent trades - large spread between 'ask' and 'bid' prices - large price fluctuation from sale to sale


What is the purpose of exchanges (auction markets)?

To increase liquidity in the market


Exchanges can also be referred to as...

Auction markets - prices are determined by supply and demand, through a 'bid' & 'ask' process.


Define the following terms: 1- Bid 2- Ask 3- Spread 4- Last price

Bid- highest price a buyer is willing to pay Ask- lowest price seller is willing to accept Spread- the difference between the 'ask' & 'bid' price Last price (market price)- price security was last traded at


What are the advantages to a company for listing shares on an exchange?

1- increased awareness/ marketability of shares 2- increased public confidence as listing companies must meet certain criteria


How do exchanges finance their operations? (3 ways)

1- transaction fees paid for each order processed 2- initial listing & annual fees paid by corporations 3-sale of historical trading data and market information


Name the 7 Canadian exchangesq

1) TSX - Toronto Stock Exchange 2) TSX Venture Exchange 3) Alpha Exchange 4) MX/ Bourse de Montreal - Montreal Exchange 5) Natural Gas Exchange 6) Canadian Securities Exchange 7) ICE Futures Exchange


What type of financial products are listed on the Toronto Stock Exchange (TSX)

- senior equities & some debt instruments such as bonds, which are converted into listed equities


What type of financial products are listed on the TSX Venture Exchange?

- Junior equities (smaller companies) and some debentures


What type of financial products are listed on the Alpha Exchange?

- equities, debentures, exchange traded funds and other structured products - some crossover with TSX and TSX venture exchange


What type of financial products are listed on the Montreal Exchange (MX/ Bourse de Montreal)?

- treats ALL financial and equity futures and options


What type of financial products are listed on the Natural Gas Exchange?

- North American natural gas and electricity


What type of financial products are listed on the Canadian Securities Exchange?

- equities of emerging (newer) companies


What type of financial products are listed on the ICE Futures Exchange?

- agricultural futures and options


Almost all bonds and departures are sold through what type of market?

Dealer markets - A network of dealers trade with each other through a computer network or over the telephone. - unlike auction markets in which individual buyers and sellers a bid and ask prices are entered, in dealer markets the actual dealers post the bid and ask prices there by acting as market makers for a particular security


What are market-makers?

A trader employed by a securities firm who is authorized and required, by applicable self-regulatory organizations (SROs), to maintain reasonable the liquidity in securities markets by making firm bids or offers for one or more designated securities.


What is SROs an acronym for?

Self-Regulating Organization