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CSC - Chapter 1

Canadian Securities Course Chapter 1

QuestionAnswer
Capital is: Wealth. Real: Land and buildings. Representational: money, stocks and bonds.
Capital savings can be used: Directly: individuals invest in a home, govs invest in infrastructure, a company purchases plant and equipment. Indirectly: purchase of stocks, bonds or savings in a back. The institute the uses the capital for direct investment.
Characteristics of Captial: Scarce, mobile, and sensitive to evironment.
Capital prefers: Countries with stable governments, economic activity that isn't over-regulated, investment climate is hospitable, and the existance of profitable opportunities.
Risk evaluation of a country is determined by: Part 1 The political environment. (Internal or external conflicts) Economic Trends. (GDP, inflation) Fiscal Policy. (Taxes and government spending)
Risk evaluation of a country is determined by: Part 2 Monetary Policy. (Sound management and growth of money supply) Investment opportunity. (Exists and offer suitable returns) Charateristics of Labor Force. (Skilled and productive)
Capital moves: To uses and users that offer the highest risk-adjusted returns.
Capital is used: To provide new plant and equipment, to ensure expanded output capability, impove productivity, increase competitivess and the development of innovative and desirable products.
Insufficient capital equals: Insufficient output, decrease in productivity, increase in unemployment, decrease in competitiveness in domestic and international markets. It equates to a lower standard of living.
Sources of capital savings: (Non-financial corporations) Produce the largest part. Used internally. Not an important contributor to others in the capital market.
Sources of capital savings: (Retail Investors) Buy and sell securities of their personal account
Sources of capital savings: (Institutional Investors) Pension funds, mutual funds. They trade in large volume.
Sources of capital savings: (Foreign Investors) Foreign direct investment in Canada is typical in manufacturing, petroleum, natural gas, mining and smelting.
Two categories of capital savings sources: Individuals. Non-residents. (Corporate or private)
Users of capital: (Foreign Users) Part 1 (Businesses or Governments) Access by borrowing from Canadian Banks or making their securities available to Canadian Markets.
Users of capital: (Foreign Users) Part 2 Our capital is desired when it can be accessed at a less expensive rate then their own. Foreign securities may be good for diversification.
Users of capital: (Businesses) Part 1 Needed to renew and maintain plant and equipment and to expand and diversify. Mostly generated internally, some borrowed from financial intermediaries. (chartered banks)
Users of capital: (Businesses) Part 2 Remainder raised through securities market. (Issuance of short term money market paper, medium and long term debt, preferred and common stock)
Users of capital: (Governments, Federal) When revenues fail to meet expenditures or for large capital projects. They issue T-Bills, marketable bonds, CSBs and CPBs to raise borrowed cash.
Users of capital: (Governments, Provincial) Part 1 When revenues fail to meet expenditures or for large capital projects. They issue bonds to the Federal Government or borrow from CPP. (or QPP)
Users of capital: (Governments, Provincial) Part 2 They also issue debt domestically through investment dealers who sell issues to financial institutions or retail investors. They may also issue short term T-Bills and in some cases their own Savings Bonds.
Users of capital: (Governments, Municipal) They spread their costs over a period of years through the issuance of instalment debentures. (Costs for streets, sewers, water works, PD, FC, transport, electric, etc...)
Securities are: Formal, legal documents, which set out the rights and obligations of buyers and sellers.
Debt instruments are: Issuers promise to repay a loan and make interest payments in the interim. (Bonds, debentures, mortgages, T-Bills and commercial paper.)
Equity instruments are: (Stocks or shares) Investors gain a stake in a company. They share in the company's fate. They may receive a dividend. Main types are preferred and common stock.
Investment funds are: Companies or trusts that manage investments for its' clients. Mutual Funds: (Open-Ended Fund) Raises capital by selling shares and then invests the capital. Investors receive part of the money made from the fund.
Derivatives are: Based on or derived from an underlying instrument. (Stock or Index) Most common are options and forwards.
Other instruments are: Linked notes and ETFs. (Engineered products that contain characteristics of debt, equity and investment funds)
Private Equity is: The financing of firms unwilling or unable to find capital using public means. (Encompasses both debt and equity investment)
Characteristics of Private Equity: Risker, longterm returns typically exceed other asset classes, typically higher investment minimums.
Role of Private Equity is: (for the investor) Return enhancement and (to a certain extent) portfolio diversification.
Venture Capital finances business when: They produce little or no cash flows, invest most revenue in uproven technologies or production processes, and have little assets to offer as collateral.
Private equity financed by (Leveraged Buyouts) Acquisition of companies financed with equity and debt. (Very common)
Private equity financed by (Growth Capital) Financing of expanding firms for their acquisitions or growth rates.
Private equity financed by (Turn Around) Investment in underperforming or out of favor industries that are in need of financing or restructuring.
Private equity financed by (Early Stage Venture Capital) Investment in firms in their infancy stages of developping products or services. Typical of high growth industries such as health care and technology. Limited number of customers.
Private equity financed by (Late Stage Venture Capital) The financing of firms which are established but still not profitable enough to be self-sufficient. Revenue growth very high.
Private equity financed by (Distressed Debt) Purchase of debt securities of private or public companies that are trading below par due to financial troubles at the firm.
Typical Private Equity Investors are: Public Pension Plans, Private Pension Plans, Endowments, Foundations, High Net Worth Investors.
Characteristics of a well organized Financial Market: They provide speedy transactions, low transaction cost, with a high degree of liquidity and effective regulation.
The purpose of an Investment Advisor or Bond Dealer is: To buy and sell securities on their clients behalf.
The Capital Market (Securities Market) is made up of: Stock markets, bond markets and money martkets.
The role of the primary securities market is: Part 1 To allow governments and companies to sell securities to investors for the first time. Companies raise capital by selling stocks and bonds. Governments raise capital by selling bonds.
The role of the primary securities market is: Part 2 The purchase is done directly from issuing agency. The initial issue is called an IPO.
The role of the secondary securities market is: To allow investors to trade previously issued securities. Buyers and sellers trade with each other at a mutually acceptable price. Issuing company receive no proceeds from these transactions.
A BID is: The highest price a buyer is willing to pay for a security being quoted.
The OFFER (ASK) is: The lowest price a seller will accept.
The SPREAD is: The difference between the Bid and the Ask.
The LAST Price is: The Price at which the last trade on the stock took place. (Market Price) May not reflect the current price that you can currently buy or sell a stock.
Describe the transaction process of an Auction Market: Bids and Offers are channeled through the market. If a Bid matches an offer a transaction may be executed. (That price becomes the Last Price)
A stock exchange is: Where securities are traded and prices are established based on the laws of supply and demand. Canadian Exchanges are auction markets.
The following is traded on Canadian stock exchanges: Common and preferred shares, rights warrants, listed options and futures contracts, instalment receipts, ETFs, income trusts and a few convertible debentures.
Name a difference between Canadian and American (as well as some European) stock exchanges: In US and some European exchanges bonds and debentures are traded with equities.
Describe the liquidity of a market: Characterized by frequent sales, a narrow spread between bid and ask, and small flucuations between sales.
The TSX deals in: Senior equities, some debt instruments that are convertible into a listed equity, income trusts and ETFs.
TSX Venture Exchange deals in: Junior securities, and a few debentures.
CNSX deals in: Securities of emerging companies. (Acts as an alternative to the TSX Venture.
MX deals in: All financial and equity futures and options.
ICE Futures Canada deals in: Agricultural futures and options.
The number of exchanges in the world is: Over 80 stock exchanges in the world. 10 in N.A., 35 in Eu., 10 in C.&S.A., and the rest in Asia, Africa and Australia.
Dealer Markets (or OTC) are: A network of dealers who trade with each other. These are a negotiated market.
Dealers act as: Market makers in a particular security.
Market Makers work for: Investment dealers and must be approved by the exchange to carry out market making duties on assigned stocks.
Market Makers are responsible to: Monitor the opening of trading to ensure orders are properly executed, maintain a two-sided market at an agreed upon maximum spread throughout the day, and execute all tradable orders that meet a max number of shares agreed upon with the exchange.
Dealer Markets trade in: Part 1 Everything: Almost all bonds and debentures are sold through dealer markets. The volume of trading in dollars is significantly larger than the equities market.
Dealer Markets trade in: Part 2 Many junior issues and the shares of some conservative industrial companies are traded OTC.
Three characteristics of dealer market Equities: Many of the stocks are more speculative and may offer lower liquidity than listed securities. The volume of unlisted equity business is smaller than the volume of stock exchange transactions.
OTC trading of Equities works: Much like bonds. Market makers enter bids and asks. The hold an inventory of certain securities. They sell and buy from this inventory
In OTC trading an investor who wishes to buy or sell an unlisted security will: His broker will consult the bid/ask quotations of various market makers to identify the best prices. They then contact the maker to complete the transaction. (The broker charges a commision)
The player in the OTC derivatives market are: Mostly financial insitutions, or corporate clients.
The OTC derivatives market is: Open 24 hrs a day. Derivatives may be custom designed by the buyers and the seller. They may be more complexe.
Trades in the unlisted market are reported: They do not need to be reported; except for in Ontario. They are reported to the Canadian Unlisted Board Inc. (It is required by OSA)
Other Trading Systems: A QTRS are: Quotation and Trade Reporting Systems. Entities other than exchanges or registered dealers that disseminate price quotations for the purchase and sale of securities. They report completed transactions to the appropriate commission.
A QTRS must: Be recognized by a provincial securities regulatory authority.
Other Trading Systems: An ATS is an: Alternative Trading System. Privately owned computerized trading facilities that match buy and sell orders for securities traded outside recognized exchanges.
ATSs may be owned by: Individual brokerage firms or groups of brokerage firms.
An ATS will: Compete with exchanges. They match orders directly from an inventory or act as an agent to bring buyers and seller together. (More commission kept by dealer)
ATSs are mostly used by: Institutional investors to reduce transaction costs. Some non-brokerage ATSs even allow buyers and seller to contact each other directly.
Fixed-Income Electronic Trading Systems are dealer markets that sell: All bond and money market securities.
Fixed-Income Electronic Trading Systems: CANDEAL: An ATS and investment dealer. Offers access to government and money market securities to institutional investors.
Fixed-Income Electronic Trading Systems: CBID (Retail): Accessible by registered dealers on behalf of retail clients.
Fixed-Income Electronic Trading Systems: CBID (Institutional): Accessible by registered dealers, institutional investors, governments and pension funds.
Fixed-Income Electronic Trading Systems: CANPX: Information processor for Gov and Corporate debt securities that provides investors with real time bid and offer prives and hourly trade data. Covers Gov. Can. Bonds, T-Bills, Prov. Bonds and a selected list of Corp. Bonds from major industrial issuers.
Created by: FrankLemieux