Browse Canadian Investment Marketplace

2.5 Summary

Summary of key concepts of capital markets covered in Chapter 2.

Chapter Summary

In this chapter, we comprehensively discussed the following key aspects of the capital market:

Characteristics of Capital

  • Mobility: Capital can move from one investment to another, seeking the highest return.
  • Sensitivity: Capital is responsive to economic, political, and social changes.
  • Scarcity: Limited availability of capital necessitates optimal allocation.

Capital can be invested directly (e.g., buying a house) or indirectly (e.g., purchasing company stock).

Uses of Investment Capital

  • Individuals: Use capital for major purchases (e.g., homes, education) and savings accounts.
  • Businesses: Use capital to finance operations, plants, equipment, or growth initiatives.
  • Governments: Use capital to finance social programs and infrastructure projects.
  • Foreign Investors: Utilize Canadian capital when it offers lower borrowing costs compared to other currencies.

Types of Securities

  • Bonds and Debentures: Represent the issuer’s debt and come with a promise of repayment at maturity with interest.
  • Equity: Represents ownership shares in a company, with investors aiming to profit as the company’s value appreciates.

Financial Markets

Financial markets facilitate capital transfer between investors and users in the following ways:

  • Primary Market: Where new issues and initial public offerings (IPOs) are bought and sold.
  • Secondary Market: Where previously issued securities are traded among investors.
  • Individual Markets: Include stock markets, bond markets, and money markets.

Market Classifications

  • Auction Markets: Clients’ bid and ask quotations for a stock are channelled to a stock exchange where they compete.
  • Dealer Markets: Networks of dealers who negotiate prices among themselves.

Review Questions

After completing this chapter, you should be able to answer the Chapter 2 Review Questions. Refer to your text materials and class notes to ensure a thorough understanding of the concepts discussed.

Frequently Asked Questions

Should you have any questions about this chapter, you may find the answers in the online Chapter 2 FAQs:

  1. What is the difference between primary and secondary markets?
  2. How does investment capital benefit individuals and businesses differently?
  3. What are the main characteristics of capital?
  4. How do auction markets differ from dealer markets?
  5. What role do foreign investors play in the Canadian capital market?

Additional Resources

Consider reviewing the following terms and their definitions to solidify your understanding:

  • Capital Mobility: The ability to transfer capital from one investment to another.
  • Capital Sensitivity: The responsiveness of capital to changes in the global market environment.
  • Capital Scarcity: The limited supply of investable funds, requiring careful allocation.
  • Bonds: Debt securities where issuers promise to repay the principal along with interest at maturity.
  • Debentures: Unsecured bonds that are backed only by the general creditworthiness of the issuer.
  • Equity: Shares representing ownership in a corporation.

Key Takeaways

  • Capital’s three characteristics majorly impact how it is strategically invested; these characteristics are mobility, sensitivity, and scarcity.
  • Various actors, including individuals, businesses, governments, and foreign investors, utilize capital to achieve distinct objectives.
  • Markets, both primary and secondary, play a crucial role in the efficient allocation of capital.
  • Understanding market types such as auction and dealer markets can significantly enhance your investment strategizing and decision-making processes.

Mermaid Chart

    flowchart TD
	  A[Capital Markets] -->|Primary Markets| B[New Issues]
	  A -->|Secondary Markets| C[Existing Securities]
	  B --> D[IPOs]
	  B --> E[New Bonds]
	  C --> F[Stock Trades]
	  C --> G[Bond Trades]
	  H[Auction Markets] -->|Exchange Traded| F
	  I[Dealer Markets] -->|OTC Trades| G

📚✨ Quiz Time! ✨📚

🧐 Assess and Solidify Your Understanding

Welcome to the Knowledge Checkpoint! You’ll find 10 carefully curated quizzes 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 are the three characteristics of capital? - [ ] Portability, profitability, and availability - [x] Mobility, sensitivity, and scarcity - [ ] Stability, liquidity, and flexibility - [ ] Durability, scarcity, and feasibility > **Explanation:** Capital is characterized by its mobility, sensitivity, and scarcity. These characteristics affect how and where capital is deployed. ## Which of the following is an example of direct investment of capital? - [ ] Purchasing savings bonds - [ ] Buying government treasury bills - [x] Buying a house - [ ] Investing in mutual funds > **Explanation:** Direct investment of capital involves purchasing tangible assets like a house, as opposed to financial instruments like stocks or bonds. ## How do businesses primarily use capital? - [ ] To make major purchases like houses - [ ] To fund social programs - [x] To finance operations, plants, equipment, or growth - [ ] To invest in stocks and bonds > **Explanation:** Businesses use capital to finance their operations, purchase plants and equipment, and fund growth initiatives. ## How do governments use capital? - [x] To finance social programs and infrastructure - [ ] To invest in stock markets - [ ] To purchase foreign currencies - [ ] To reduce inflation > **Explanation:** Governments primarily use capital to finance social programs and infrastructure developments. ## What do bonds and debentures represent for the issuers? - [ ] Shares of ownership - [ ] Income from stock market investments - [x] Debt obligation - [ ] Equity in the company > **Explanation:** Bonds and debentures represent a debt obligation where the issuer promises to repay the principal along with interest at maturity. ## What type of equity do investors purchase in a company? - [ ] Bonds - [ ] Debentures - [ ] Government securities - [x] Shares of ownership > **Explanation:** Equity represents shares of ownership in a company, offering investors a stake in the company's value appreciation. ## What is the primary function of the financial markets? - [ ] Only to facilitate stock transactions - [ ] To support government policies - [x] To facilitate the transfer of capital between investors and users - [ ] To reduce interest rates on savings > **Explanation:** Financial markets function to facilitate the transfer of capital from investors to users, enabling investment and funding needs. ## What distinguishes primary markets from secondary markets? - [x] Primary markets deal with new issues, while secondary markets deal with previously issued securities - [ ] Primary markets only sell stocks, while secondary markets only sell bonds - [ ] Primary markets are regulated, while secondary markets are not - [ ] There is no distinction; they function the same way > **Explanation:** Primary markets handle the issuance of new securities, whereas secondary markets trade previously issued securities. ## How are auction markets different from dealer markets? - [ ] Auction markets are unregulated, while dealer markets are regulated - [x] In auction markets, bid and ask quotations compete on a stock exchange; dealer markets involve dealers negotiating prices - [ ] Auction markets deal only with IPOs; dealer markets deal with secondary trading - [ ] Auction markets are more profitable than dealer markets > **Explanation:** Auction markets involve competitive bidding on a stock exchange, whereas dealer markets involve price negotiations between dealers. ## Why might foreign investors use Canadian capital? - [ ] To invest in Canadian retail businesses - [ ] Due to lower Canadian interest rates compared to other currencies - [ ] To avoid taxes in their home countries - [x] Because it costs less to borrow than other currencies > **Explanation:** Foreign investors may use Canadian capital when it is cheaper to borrow than in other currencies.

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Saturday, July 13, 2024