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Question: Why would those who have extra wealth / capital transfer it to
those who require it?
Introduction (contd)
Savings of:
Individuals (you and me)
Corporations
Governments
Financial assets:
Stocks
Bonds
Treasury bills
Companies and governments issue these financial assets and receive funds
They then take these funds and invest the funds directly
Investors buy these financial assets to generate a return (ie. Make more
money than originally invested)
Efficient allocation of capital
In other words
Those who have capital will only transfer / invest it if it is easy, cheap and
generates a good return
This depends on
Capital flows depend on
Retail investors individuals like you and me (okay, maybe not you given
size of tuition payments)
Institutional investors
Pension funds (Canada Pension Plan Investment Board; Ontario Teachers)
Mutual funds (Trimark, AGF)
Foreign investors:
Can include foreign retail, institutional and government investors
Investments are made directly in Canadian firms or through stocks / bonds for Canadian
firms listed on foreign exchanges
Users of capital
Users of capital
Individuals dont (if needed they will go to a bank for a loan)
Companies / businesses:
Earn money internally through existing operations and reinvest that money (think Apple
with its huge pile of cash)
Raise $ by issuing stocks / bonds (think Facebook initial public offering)
Debt
Funds are borrowed
At a specific date (the maturity date) these funds are paid back
Between the borrowing date and the maturity date, interest payments are paid
In the interim, interest payments are made
Equity
Typically represented by stock / shares in a company
As an equity investor, you own part of the company
At annual meetings, you have voting privileges
You may also received regular dividend payments (but not necessarily)
The Role of Financial Instruments (contd)
Investment Funds
Buys and sells stocks / bonds typically through a mutual fund
Derivatives
These products derive their value from another assets (stock, bond, commodity,
currency)
Often used for hedging (ie. Mitigate the effect of a strong C$ or higher oil prices)
Private Equity
Invest in both debt and equity
Typically investments are made directly in companies (not through purchases of stock or
bonds)
Funds are provided by pension funds, endowments, wealthy individuals
Primary markets:
Securities (ie. shares or bonds) are sold by issuers for the first time
The issuer receive the money from this sale
It may be an IPO or a subsequent equity offering
Secondary markets:
Where securities previously issued (above in the primary markets) are
bought and sold:
Note: funds do not go to the issuer
Example: 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)
Financial Markets (contd)
What is an IPO?
Initial pubic offering
The first time a company sells its shares to the public and its shares are
listed on a stock exchange (ie. Toronto Stock Exchange)
See previous Facebook example
Financial intermediaries
The financial crises exposed areas where firms were working in their self
interest and also working against market efficiency / a product economy.
Auction markets
In Canada: 3 exchanges:
The TSX (Canadas main exchange for medium to large size companies)
The TSX Venture Exchange (junior companies)
The Canadian National Stock Exchange (alternative exchange for junior / emerging
companies)
TSX is the 8th largest in the world; New York Stock Exchange is the largest
Most exchanges today are public companies that are listed on stock
exchanges themselves
Stock Exchange Fees and Trends
Trends:
Stock exchanges have largely transferred from physical locations to
trading systems.
As a result, speed and cost efficiency are crucial
Stock exchanges around the world have been joining together (through
mergers & acquisitions) to become bigger and better
Dealer Markets: The Unlisted Market
Investment dealers who trade directly with each other over the phone or
a computer network (not an exchange)
Most bonds are traded through these networks; very few stocks are
There are no listing requirements
Unlisted trades are not reported except in Ontario
Alternative Trading Systems (ATS)
Increased scrutiny and regulation is likely to come for the alternative trading
systems.
Currently, ATS are governed by IIROC (Investment Industry Regulatory
Organization of Canada)