Chapter 1: Capital Market Flashcards Preview

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Flashcards in Chapter 1: Capital Market Deck (29)
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1
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 in 1 and 2)
2
Q

Capital

A

savings of individuals, corporations, and governments

3
Q

Direct Investment

A

assets that generate wealth (land, real estate, equipment, etc)

4
Q

Indirect Investment

A
  • Financial assets: stocks (ownership of company), bonds (debt of company or government), treasury bills (debt of government)
  • Companies and governments issue these financial assets and receive funds. The funds are used to invest in the funds directly
  • Investors buy these financial assets to generate a return
5
Q

Efficient Allocation of Capital

A

Capital is mobile, scarce and sensitive (those who have capital will only transfer/invest if it is easy, cheap, and generates good return)

6
Q

Capital Flow Depends on…

A
  • Political environment
  • Economic trends
  • Fiscal policy (government spending and taxation)
  • Monetary policy (government by central banks)
  • Investment opportunities
  • Labour force (highly educated/laws governing rights of labour force)
7
Q

Sources of Capital

A

Retail, institutional and foreign investors provide capital

8
Q

Retail Investors

A

Individuals

9
Q

Institutional Investors

A

pension funds and mutual funds

10
Q

Foreign Investors

A
  • foreign retail, institutional and government investors

- Investments are made directly in Canadian firms or through stocks/bonds for Canadian firms listed on foreign exchanges

11
Q

Financial Instruments

A

mechanisms by which wealth/capital is transferred (what is actually bought/sold)

12
Q

Debt

A
  • Funds are borrowed
  • At specific date (“maturity date”) these funds are paid back
  • Between the borrowing and maturity date, interest payments are paid
13
Q

Equity

A
  • Typically represented by stock/shares in a company
  • As equity investor, you own part of the company
  • At annual meetings, you have voting rights
  • May receive regular dividend payments (not necessarily)
14
Q

Investment Funds

A

buys and sells stocks/bonds (typically through mutual funds)

15
Q

Derivatives

A

these products derive their value from another asset (stock, bond, commodity, currency) often used for hedging (ex. Mitigate the effect of a strong C$ or higher oil prices)

16
Q

Private Equity

A
  • invest in both debt and equity
  • typically investments are made directly in companies (not through stock or bonds)
  • Funds are provided by pension funds, endowments, and wealthy individuals
17
Q

Efficient market properties

A
  • Fast (can I buy / sell a stock with minimal delay)
  • Cheap (low fees to buy / sell)
  • Liquid (are there many buyers and sellers)
  • Ex. Buying or selling a house may not be efficient, buying or selling a stock or a bond should be
18
Q

Primary Markets

A
  • Securities (shares or bonds) are sold by issuers for the first time
  • Issuer receives the money from this sale
  • May be an IPO or subsequent equity offering
19
Q

Secondary Markets

A
  • Where securities previously issued (above primary markets) are bought and sold (funds do not go to the 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)
20
Q

IPO (Initial Public Offering)

A

first time a company sells its shares to the public and the shares are listed on the stock exchange

21
Q

Auction Market

A

like any other market where items are bought and sold. A stock exchange is an auction market where stocks are bought and sold (all transactions converge in one location).

22
Q

How does the stock exchange make money?

A
  • Transaction fees (you pay a fee when buying or selling a stock)
  • Initial listing fees (company conducts IPO they pay a fee)
  • Fees from companies making capital structure changes
  • Sale of historic data
23
Q

Trends in stock exchanges

A
  • Stock exchanges have largely transferred from physical locations to trading systems (speed and cost efficiency are crucial)
  • Stock exchanges around the world have been joining together (through mergers & acquisitions) to become “bigger and better”
24
Q

Financial Intermediaries

A

People and companies that improve market efficiency by facilitating the flow of capital from buyers to sellers

  • May work in their self interest
  • Regulations are meant to be structured such that marker efficiency is a by-product of this self interest
  • The financial crises exposed areas where firms were working in their self interest and also working against market efficiency/product economy
25
Q

Examples of Financial Intermediaries

A
Bank of Canada
Banks
Insurance companies
Pension Funds
Investment dealers
Private equity/venture capital firms
26
Q

Function of financial markets

A

Help facilitate transfer of capital

27
Q

Users of Capital

A

Companies/businesses
- Earn money internally through existing operations and reinvest that money
- Raise funds by issuing stocks/bonds
more and generate additional returns
Governments (federal, provincial, municipal) issue debt
- Treasury bills (debt due in less than one year), longer term debt, Canada Savings Bond (federal/provincial governments only)

28
Q

What do companies/businesses invest funds in?

A

New products/markets/machinery that they hope will grow the company more and generate additional returns

29
Q

What does the government invest funds in?

A

All forms of government spending that aren’t covered by tax and other revenues
Healthcare, education, infrastructure spending (roads, sewers, water, etc)