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2. Capital Market

A comprehensive guide to understanding the intricacies of the capital market, including investment capital, financial instruments, and financial markets, designed for the Canadian Securities Course certification exam.

Chapter Overview

In this chapter, you will learn about investment capital, including what it is, why we need it, where it comes from, and who uses it. You will also learn about the different types of financial instruments that are traded in the financial markets. In discussing the financial markets themselves, we explain the difference between primary and secondary markets and between auction and dealer markets. Finally, you will learn about the electronic trading systems that are used in both equity and fixed-income markets.

Learning Objectives

Content Areas

  1. Describe the role of investment capital in the economy: Including its supply and use.
  2. Differentiate between the types of financial instruments: Used in capital transactions.
  3. Describe the distinguishing features and operation of the various types of financial markets.

Key Terms

Key terms are defined in the Glossary and appear in bold text in the chapter.

  • alternative trading system
  • ask price
  • auction market
  • bid-ask spread
  • bid price
  • Canadian Securities Exchange
  • Canadian Unlisted Board Inc.
  • CanDeal
  • CanPX
  • capital
  • CBID
  • CBID Institutional
  • common share
  • dealer market
  • equity securities
  • ICE NGX Canada
  • institutional investor
  • investment advisor
  • last price
  • liquidity
  • MarketAxess
  • market maker
  • money market
  • Montréal Exchange
  • NEO Exchange
  • Nodal Exchange
  • over-the-counter market
  • preferred share
  • primary market
  • retail investor
  • secondary market
  • stock exchange
  • Toronto Stock Exchange
  • TSX Alpha Exchange
  • TSX Venture Exchange
  • unlisted market

Key Takeaways

The following points summarize the critical elements of this chapter:

  • Investment Capital: Explains the importance of investment capital, its sources, and uses.
  • Financial Instruments: Defines various financial instruments used in capital markets.
  • Financial Markets: Describes the different types of financial markets, including primary, secondary, auction, and dealer markets.
  • Electronic Trading Systems: Covers the role and functioning of electronic trading systems in current financial markets.

Frequently Asked Questions (FAQs)

Q1: What is investment capital?

Investment capital refers to the funds that investors use to purchase financial assets, such as stocks, bonds, and other securities. It is crucial for companies and governments to finance their operations and growth.

Q2: What are primary and secondary markets?

The primary market is where new securities are issued and sold for the first time, such as in an Initial Public Offering (IPO). The secondary market is where existing securities are traded among investors.

Q3: What is the difference between auction markets and dealer markets?

In an auction market, buyers and sellers submit competitive bids, and the highest bid is matched with the lowest ask price. In a dealer market, transactions are facilitated by dealers who hold an inventory of securities and quote the buy and sell prices.

Q4: How do electronic trading systems work?

Electronic trading systems use computer networks to facilitate the trading of securities, providing increased efficiency, transparency, and reduced trading costs.


  • Alternative Trading System (ATS): A non-exchange trading venue that matches buyers and sellers to fulfill orders.
  • Ask Price: The lowest price a seller is willing to accept for a security.
  • Auction Market: A market where buyers and sellers enter competitive offers simultaneously.
  • Bid-Ask Spread: The difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept.
  • Dealer Market: A market facilitated by dealers who maintain inventories and quote buy and sell prices.

Diagrams and Charts

Figure 1: Primary and Secondary Markets Diagram

    graph TD;
	    A[New Securities Issued] -->|Primary Market| B(Investors with New Securities);
	    B -->|Secondary Market| C[Investors Trading Securities];
	    C --> B;

Figure 2: Auction vs Dealer Markets Diagram

    graph LR;
	    A[Buyers] -->|Auction Market| B[Match Through Offers];
	    B[Match Through Offers] -->|Seller| C[Sellers];
	    A2[Buyers] -->|Dealer Market| D[Dealers (Bid-Ask Spread)];
	    D[Dealers (Bid-Ask Spread)] --> C2[Sellers];

Further Reading

This chapter equips Canadian Securities Course candidates with foundational knowledge necessary to understand and navigate the capital market.

CSC® Exams Practice Questions

📚✨ CSC Exam Questions ✨📚

Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

Good luck!

## What is one of the key roles of investment capital in the economy? - [ ] To increase taxation - [ ] To limit market growth - [x] To supply funds for business operations and expansion - [ ] To eliminate competition > **Explanation:** Investment capital supplies the necessary funds for businesses to operate and expand, contributing to economic growth and development. ## What distinguishes common shares from preferred shares? - [ ] Common shares have fixed dividend payments - [x] Common shares typically have voting rights, while preferred shares usually do not - [ ] Preferred shares have higher risk and reward - [ ] Common shares are not traded on stock exchanges > **Explanation:** Common shares generally come with voting rights, allowing shareholders to have a say in corporate decisions, whereas preferred shares do not but often come with fixed dividend payments. ## What is the primary market primarily used for? - [ ] Trading financial instruments among investors - [ ] Providing liquidity for secondary market transactions - [x] Issuing new securities to raise capital for issuers - [ ] Facilitating electronic trading > **Explanation:** The primary market is where new securities are issued and sold to investors for the first time to raise capital for issuers. ## In the context of financial markets, what is an "auction market"? - [ ] A market where fixed prices are offered - [x] A market where buyers and sellers enter competitive bids and offers - [ ] A market with only automated transactions - [ ] A market controlled by a single market maker > **Explanation:** An auction market involves multiple buyers and sellers entering their bids and offers, allowing prices to be determined by the highest bid and lowest offer. ## Which of the following is an example of an electronic trading system? - [x] MarketAxess - [ ] Primary market - [ ] Preferred share - [ ] Auction market > **Explanation:** MarketAxess is an example of an electronic trading system used to facilitate transactions in financial markets. ## What is the bid-ask spread? - [ ] The price difference between two different stocks - [x] The difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept - [ ] The commission charged by brokers - [ ] The price fluctuation during a trading day > **Explanation:** The bid-ask spread is the difference between the highest bid price and the lowest ask price in a market transaction. ## Which market is characterized by trading securities that are not listed on formal exchanges? - [ ] Primary market - [x] Over-the-counter market - [ ] Auction market - [ ] Dealer market > **Explanation:** The over-the-counter (OTC) market deals with securities that are not listed on formal exchanges, often involving direct transactions between parties. ## What is a "market maker"? - [x] A firm or individual that buys and sells securities at specified prices to provide liquidity - [ ] An investor in the primary market - [ ] An advisor to retail investors - [ ] A government regulator > **Explanation:** A market maker is a firm or individual responsible for providing liquidity by buying and selling securities, ensuring that there are always buy and sell prices available. ## What is the difference between a stock exchange and an unlisted market? - [ ] Stock exchanges deal only with bonds; unlisted markets deal with stocks - [x] Stock exchanges are formal, regulated markets with listed securities; unlisted markets deal with securities not formally listed - [ ] Unlisted markets are safer and have higher liquidity - [ ] Stock exchanges are run by government agencies > **Explanation:** Stock exchanges are formal, regulated markets where securities are officially listed, whereas unlisted markets involve transactions of securities that are not listed on formal exchanges. ## Who are institutional investors? - [ ] Individual retail investors - [x] Large organizations like pension funds, mutual funds, and insurance companies that invest significant amounts in financial markets - [ ] Only entities buying government securities - [ ] High-frequency traders > **Explanation:** Institutional investors are large organizations that invest large sums of money in financial markets, including entities such as pension funds, mutual funds, and insurance companies.

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In this section

  • 2.1 Introduction
    Comprehensive overview of the securities industry's role in the Canadian economy, discussing the transfer of capital, the importance of financial intermediaries, markets, and instruments.
  • 2.2 Investment Capital
    Explore the role of investment capital in the economy, focusing on its supply, use, and differentiating between direct and indirect investments. Learn about economic value and the importance of productive investment.
    • 2.2.1 Characteristics Of Capital
      Understand the key characteristics of capital in the context of investment management, including mobility, sensitivity, and scarcity.
    • 2.2.2 Suppliers And Users Of Capital
      Explore the determinants of capital supply and usage in Canada, identifying key players and their roles in the financial ecosystem. This guide elaborates on the sources like individual savings, corporate revenues, and government surplus while detailing the diverse requirements for capital among individuals, businesses, and governments.
  • 2.3 Financial Instruments
    Discover the various types of financial instruments used in capital transactions, including debt securities, equity securities, derivatives, managed products, and structured products, along with examples and key features.
  • 2.4 Financial Markets
    Understand the features, operations, and types of financial markets. Explore the roles of intermediaries and the characteristics of effective markets.
    • 2.4.1 Primary And Secondary Markets
      Learn the intricacies of the primary and secondary markets, how they function, and their roles in the financial ecosystem. Dive into the specifics of initial public offerings (IPOs), trading mechanisms, and much more.
    • 2.4.2 Auction Markets
      Understand the workings of auction markets, including key concepts like bid-ask spreads, trades, and types of stock exchanges in Canada. This section covers the fundamental aspects of how securities are bought and sold and includes detailed examples and key definitions.
    • 2.4.3 Dealer Markets
      Exploring the workings of dealer markets, including the over-the-counter trading of bonds, debentures, and unlisted equities. The guide illuminates the methods and advantages of trading in dealer markets and synthesizes regulatory nuances in Canada.
    • 2.4.4 Alternative Trading Systems
      Learn about Alternative Trading Systems (ATS) in the Canadian financial markets, covering electronic marketplaces for equity and fixed-income markets.
  • 2.5 Summary
    Summary of key concepts of capital markets covered in Chapter 2.
Sunday, July 21, 2024