CSC Volume 1 Learning

The other major financial intermediaries in the market are:

- Chartered banks, life insurance companies, and investment funds. - Trust and mortgage companies, pension plans, credit unions and caisses populaires, sales finance and consumer loan companies, property and casualty insurance companies, and provincial savings banks.

Securities firms play an important role in the industry's two main functions:

1) They help transfer capital by bringing together suppliers and users of capital by underwriting and distributing new securities. This function is performed in the primary market, with the dealer often acting as principal, meaning the dealer owns the securities at some stage. 2) They help facilitate the trading of existing securities on the secondary market, where they can act as principals or agents. In the latter case, the dealer never owns the securities, but acts on behalf of the buyer or seller to procure them.

What is the difference between debt instruments and equity instruments?

A debt instrument is an agreement whereby the issuer promises to repay a loan on a specified date (also referred to as the maturity date). In the interim, the issuer makes fixed interest payments to the investor. An equity instrument (a stock or share) allows the investor to buy an ownership stake in the company. There are two main types of stock: common shares and preferred shares. Investors with common shares participate in a proportional claim to profits, losses and any declared dividends. These investors also have voting rights at the company's annual meeting. In contrast, owners of preferred shares are entitled to a fixed dividend and have a prior claim on the company's assets, but do not participate in the company's growth and are not allowed to vote.

Industry Overview Chart

Add photo.

There are three categories of investment dealers in the Canadian securities industry: integrated firms, institutional firms and retail firms.

Add photo.

What is the difference between CanDeal and CBID?

Both CanDeal and CBID are IIROC members and are considered to be ATSs. However, CanDeal offers institutional investors access to Government securities and to money market instruments while CBID operates retail and institutional fixed-income marketplaces. The CBID retail fixed-income marketplace is accessible by registered dealers on behalf of retail clients and the institutional fixed-income marketplace is accessible by registered dealers, institutional investors, governments and pension funds.

What is the difference between auction markets and dealer markets?

Canada's stock exchanges are auction markets. In an auction market, clients' bids and offers for a stock are channelled to a single central market and compete against each other. Brokerage firms usually act as agents for their clients. The prices of all transactions are publicly visible. Dealer markets, also known as over-the-counter (OTC) or unlisted markets, do not necessarily have a central trading location or exchange where trades flow. Market makers post their bid and ask prices, but the prices at which transactions occur are less publicly visible and may differ from the posted prices. Almost all bond trading in Canada takes place in dealer markets.

Capital

Capital represents the savings of individuals, corporations and governments. It is mobile, scarce and valuable. Capital flows toward attractive and stable economic environments where it can be used successfully. Its efficient use promotes economic growth.

How do corporations rate as sources of capital?

Corporations tend to retain their earnings and issue securities to finance their own operations and growth. Thus, corporations are not an important source of capital—they are seen as users of capital.

What is the difference between a Quotation and trade reporting systems (QTRS) and Alternative Trading Systems (ATS)?

Quotation and Trade Reporting Systems (QTRSs) are entities, other than an exchange or registered dealer, that disseminate price quotations for the purchase and sale of securities and report completed transactions to the applicable securities commission. A QTRS must be recognized by a provincial securities regulatory authority. Alternative Trading Systems (ATSs) are privately owned computerized trading facilities that match buy and sell orders for securities traded outside of recognized exchanges. ATSs can be owned by individual brokerage firms or by groups of brokerage firms. ATSs must be members of the Investment Industry Regulatory Organization of Canada (IIROC).

Flow of Capital

See photo.

The federal government finances expenditures using

T-bills and marketable bonds.

What is the difference between the primary market and the secondary market?

The primary market is the market where a security is sold when it is first issued and sold to investors. On this market, the user of capital, such as a business or government, receives capital from investors. The secondary market is the market where subsequent trading takes place and individual investors trade among themselves.

How does capital investment affect Canada's growth?

When capital investment declines, the result is insufficient output, diminishing productivity, rising unemployment and decreasing competitiveness in domestic and international markets, all of which lead to lower living standards. Sufficient capital ensures that Canada has enough productive capacity in place to compete in the global economy.

Municipal governments may issue

instalment debentures.

Individuals may use capital for

mortgages.

Businesses may issue

preferred and common shares.

Do non-residents of Canada consider Canada a good place to invest?

Generally, yes. Non-residents tend to invest in Canadian industries, particularly manufacturing, petroleum and natural gas, and mining and smelting. Controls on some industries, such as the financial industry, could be eased to encourage more foreign investment.