CSI Global Education Inc.

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The Canadian Investment Marketplace
CHAPTER 1 The Capital Market
CSI Global Education Inc.
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Chapter1---The Capital Market

• Chapter outline
• What is investment capital?
• What are the sources and users of capital?
• What are the financial instruments?
• What are the financial market?

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Learning Objectives

• Define investment capital, describe its role.
• Describe supply and use of capital.
• Types of financial instruments.
• Role of financial market, types of financial
  market.
• Private equity.

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The Role of Capital Markets

• To bring together suppliers and users of funds.
• Financial markets drive economic growth
  by transferring
• Money from those who have it
  (savers)--------gtthose who
• need it (users)
• Three key components of the securities
  industry
• Financial instruments
• Financial markets
• Financial intermediaries

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The Role of Capital Markets

• capital is wealth
• example land and buildings ,savings,
• stocks and bonds,
• Capital savings can be used directly
• Direct Investment ,
• (e.g., land, building, equipment)
• Capital savings can also be harnessed indirectly
• Indirect Investment
• (e.g., stock, bonds, treasury bills)

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Characteristics of Capital

• Why do we say that capital is
• Mobile
• Sensitive----political economic trends fiscal
  policy
• monetary policy opportunities labor force
• Scarce---It is in great demand everywhere

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Sources of Capital

• The only source of capital is savings.
• What are the implications of this for the economy
  and for the operation of financial markets?

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Main Sources of Investment Capital

• Individuals through savings
• Retail investors are individual investors who buy
  and sell securities for their own personal
  accounts
• Institutional investors are organizations, such
  as a
• pension fund or mutual fund company
• Foreign Direct Investment

Retail Investor
Institutional Investor
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Main Users of Investment Capital

• Individuals
• Businesses
• All levels of Government
• Federal ----budget deficit---budget surplus
• Provincial
• Municipal----installment debentures----serial
  debentures

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Financial Instruments

• Debt Instruments---bond
• Difference between bonds and debentures
• bond is secured by specific assets, debenture
  is
• secured only by the general credit of the
  issuer
• Equity Instruments---Stocks
• common shares and preferred shares
• Investment Funds---mutual fund
• Derivatives---option, futures

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Financial Instruments

• Other investment products---income trusts,
• exchange-traded funds(ETFs)

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Financial Markets

• Categories
• By product/instrument
• Money market
• Stock market(s)
• Bond market(s)
• Etc.

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Financial Markets

• By Distribution
• Primary---the market where a security is sold
  when
• it is first issued and sold to investors.
• IPO---initial public offering
• Secondary---individual investors trade among
  themselves.
• secondary market provides liquidity

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Financial Markets

• liquid market is characterized by
• Frequent sales
• Narrow price spread between bid and offering
  prices
• Small price fluctuations from sale to sale

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Financial Markets

• By Method of Operation
• Auction markets---clients bids and offers for a
  stock are channeled to a single central market
  and compete against each other.
• Bid price is the highest price a buyer is willing
  to pay.
• Ask Price is the lowest price a seller will
  accept.
• Dealer markets---a network of dealers who trade
  with each other
• OTC (over-the-counter )market dealer market
• Almost all bonds and debentures are sold
  through dealer markets.

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Financial Markets

• By Longevity
• Short Money
• Long Capital

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Primary and Secondary Markets

• Questions
• What are the main features of the primary and
  secondary markets?
• How do these two markets differ?

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Primary and Secondary Markets

• Primary Markets
• Deals with the issue of new securities.
• Funds flow from an investment dealer to the firm.
  
• The new securities are then sold at a higher
  price to the public.
• Secondary Market
• Deals with already existing and outstanding
  securities.
• Trading occurs between investors, not the company.

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The Markets

• Money Market
• Any debt maturing within one year, regardless of
  when issued
• Treasury-bills, Bonds with lt 1yr maturity,
  Bankers Acceptances
• Debt instruments only
• Capital Markets
• Longer term securities (stocks, bonds gt 1 yr)
• Conducted through dealer markets (OTC) and
  auction markets(exchanges)

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Auction and Dealer Markets

• The auction and dealer markets are the two main
  types of markets.
• Discussion
• What are the main features of each?
• How are they alike and how do they differ?

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Auction Markets

• Toronto Stock Exchange (TSX)
• TSX Venture Exchange (TSX V)
• The orders of individual buyers and sellers are
  entered todetermine prices
• Prices are established according to supply and
  demand forces
• Form of competitive bidding

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Auction Markets

• Exchanges
• Enforce membership conditions
• Monitor/audit members
• Set trading rules
• Control listing and trading of companies

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Dealer Markets

• Also called over-the-counter (OTC) market or the
  unlisted market
• A negotiated market where a network of dealers
  trade with each other
• Dealers post bid and ask prices (Bid 1.50/Ask
  1.60)
• Profit is made on the spread
• Bonds are sold on dealer markets

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What is a Stock Exchange?

• A marketplace where buyers and sellers of
  securities meet under competitive conditions to
  trade with each other, and where prices are
  established according to the laws of supply and
  demand.

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Stock Market Criteria

• What are the criteria for a stock exchange to
  function efficiently?
• 1. Low transaction costs
• 2. Liquidity
• 3. Timely and accurate information on price and
  volume
• 4. Consumer protection

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A Liquid Market

• Liquidity is fundamental to the operation of a
  stock exchange.
• Liquidity is characterized by
• Frequent sales
• Narrow price spreads
• Small price fluctuations

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Private Equity

• is the financing of firms unwilling or unable to
  find capital
• using public means.
• Higher return, higher risk.
• It complements publicly traded equity by
  allowing businesses
• to obtain financing when issuing equity in the
  public markets
• may prove difficult or impossible.
• Several means used
• Leveraged Buyout Early
  Stage Venture Capital
• Growth Capital Late
  Venture Capital
• Turnaround
  Distressed Debt

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History, Size of Private Equity

• The growth of private equity has been remarkable
• over the last 25 years.
• Public and private pension plans, endowments,
  foundations,
• and wealthy individuals are the main investors
• in the private equity market.